Cash Flow Statement

What Is ?

The statement of cash flows, or the cash flow statement, is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company.

The cash flow statement (CFS) measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses.

The CFS allows investors to understand how a company’s operations are running, where its money is coming from, and how money is being spent. The CFS is important since it helps investors determine whether a company is on a solid financial footing.

Creditors, on the other hand, can use the CFS to determine how much cash is available (referred to as liquidity) for the company to fund its operating expenses and pay its debts.

The Structure of the Cash Flow Statement

The main components of the cash flow statement are:

  1. Cash from operating activities
  2. Cash from investing activities
  3. Cash from financing activities
  4. and disclosure of noncash activities
 

Cash from operating activities

The operating activities on the Cash Flow Statement include any sources and uses of cash from business activities. So it reflects how much cash is generated from a company’s products or services.

Generally, changes made in cash, accounts receivable, depreciation, inventory, and accounts payable are reflected in cash from operations. These operating activities might include:
  • Receipts from sales of goods and services
  • Interest payments
  • Income tax payments
  • Payments made to suppliers of goods and services used in production
  • Salary and wage payments to employees
  • Rent payments
  • Any other type of operating expenses
 

Cash from investing activities

Investing activities include any sources and uses of cash from a company’s investments. A purchase or sale of an asset, loans made to vendors or received from customers (only as investment) or any payments related to a merger or acquisition is included in this category. In short, changes in equipment, assets, or investments relate to cash from investing.

Cash changes from investing are a “cash out” item, because cash is used to buy new equipment, buildings, or short-term assets such as marketable securities. Meanwhile, when a company divests an asset, the transaction is considered “cash in” for calculating cash from investing.
 
 

Cash from financing activities

Cash from financing activities include the sources of cash from investors or banks, as well as the uses of cash paid to shareholders. Payment of dividends, payments for stock repurchases and the repayment of debt principal (loans) are included in this category.

 Changes in cash from financing are “cash in” when capital is raised, and they’re “cash out” when dividends are paid. Thus, if a company issues a bond to the public, the company receives cash financing; however, when interest is paid to bondholders, the company is reducing its cash.
 
 

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