Cash Flow Statement

A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given period. 

The cash flow statement is focused on cash accounting, whereas there are two forms of accounting, accrual and cash. Most public companies use accrual accounting, which means the income statement is not the same as the company's cash position.

For example, a company may sell product and extend its customers credit. It still recognizes that sale as revenue, but the company may not receive cash until a later date. The company is earning a profit on the income statement and will pay income taxes on it, but the business may bring in more or less cash than the sales or income figures. Even profitable companies can fail to adequately manage cash flow, which is why the cash flow statement is a critical tool for companies, analysts and investors. The cash flow statement is broken down into three different business activities: operations, investing and financing.

This is the first section of the cash flow statement and includes transactions from all operational business activities. The cash flows from operations section begins with net income and then reconciles all noncash items to cash items involving operational activities. For example, accounts receivable is a noncash account. If accounts receivable go up during a period, it means sales are up, but no cash was received at the time of sale. The cash flow statement deducts receivables from net income because it is not cash. The cash flows from operations section can also include accounts payable, depreciation, amortization and numerous prepaid items booked as revenue or expenses but with no associated cash flow.

This is the second section of the cash flow statement and can include cash spent on property, plant and equipment. This is where analysts look to find changes in capital expenditures (CapEx). While positive cash flows within this section can be considered good, investors would prefer companies that generate cash flow from business operations, not investing and financing activities. Companies can generate cash flow within this section by selling equipment or property. 

Cash flows from financing is the last section of the cash flow statement. The section provides an overview of cash used in business financing. Analysts use the cash flows from financing section to determine how much money the company has paid out via dividends or share buybacks. Cash obtained or paid back from capital fundraising efforts, such as equity or debt, is listed here, as are loans taken out or paid back.