A cash flow statement is a crucial financial document that shows how much cash and cash equivalents are generated and used during a given period. It assists the stakeholders in understanding how the company manage to meet its obligations, finance its operations and fund its growth. The cash flow statement is one of the three main financial statements that is used together with the balance sheet and the income statement to evaluate the financial performance of a company.
Content Outline
What are the 3 types of cash flow statements?
A cash flow statement is typically divided into three main components as follows.
1. Operating Activities
Operating activities show the cash inflows and outflows arising from the activities of the business. It comprises cash income from the sales of goods and services, cash outlay for purchasing goods and services, and expenses for other operating costs.
Examples: Receipts from customers, payments to suppliers, wages, rent, and utilities.
2. Investing Activities
Investing activities cover cash flows related to the acquisition and sale of long-term assets and investments. It represents the cash utilised for investing in the future operations and expansion of the business.
Examples: Purchase and sale of equipment, property, and investments, lending money, and collecting loans.
3. Financing Activities
Financing activities capture all the cash flows related to changes in the stockholders’ equity and debts. It covers operations with the owners of shares and creditors.
Examples: Issuance and repurchase of stocks, borrowing and repaying loans, and dividend payments.
What Does A Cash Flow Statement Look Like?
Here’s an example of a simplified cash flow statement for XYZ Corporation:
XYZ Corporation Cash Flow Statement for the Year Ended December 31, 2023
| Cash Flow Components | Amount (USD) |
| Operating Activities | |
| Net income | $50,000 |
| Depreciation | $10,000 |
| Changes in working capital | – $5,000 |
| Cash provided by operating activities | $55,000 |
| Investing Activities | |
| Purchase of equipment | – $20,000 |
| Sale of investments | $15,000 |
| Cash used in investing activities | – $5,000 |
| Financing Activities | |
| Issuance of common stock | $10,000 |
| Repayment of debt | – $15,000 |
| Dividends paid | – $5,000 |
| Cash used in financing activities | – $10,000 |
| Net Increase in Cash | $40,000 |
| Cash at the Beginning of the Year | $10,000 |
| Cash at the End of the Year | $50,000 |
What Does A Cash Flow Statement Tell Us?
A cash flow statement tells you how much cash is entering and leaving a company over a specific period of time. Here’s what it typically reveals:
1. Operating Activities
- Cash Inflows: Revenue from sales, collection of receivables.
- Cash Outflows: Payments for goods and services, salaries, rent, and taxes.
- Net Cash Provided by Operating Activities: Indicates the company’s ability to generate cash from its core business operations.
2. Investing Activities
- Cash Inflows: Proceeds from the sale of investments, equipment, or other long-term assets.
- Cash Outflows: Purchases of investments, equipment, or other long-term assets.
- Net Cash Used in Investing Activities: Reflects the company’s investment in its future growth.
3. Financing Activities
- Cash Inflows: Proceeds from issuing stock or taking on debt.
- Cash Outflows: Repayments of debt, dividends paid to shareholders, and repurchase of stock.
- Net Cash Provided by (or Used in) Financing Activities: Shows how the company funds its operations and growth through borrowing or equity.
4. Net Increase (or Decrease) in Cash
- The net result of cash flows from operating, investing, and financing activities.
- Indicates the overall change in the company’s cash position over the period.
5. Cash at the Beginning and End of the Period
- Shows the company’s liquidity at the start and end of the period.
- Helps assess the company’s ability to meet its short-term obligations and invest in opportunities.
From the example above, the cash flow statement shows:
- Strong Cash Flow from Operations: The company generated $55,000 in cash from operating activities, indicating strong operational performance and effective management of working capital.
- Investment in Assets: XYZ Corporation invested $20,000 in equipment, signaling a focus on growth and upgrading assets. This investment was partially offset by $15,000 from the sale of investments, leading to a net cash outflow of $5,000 in investing activities.
- Financing Strategy: The company raised $10,000 through issuing common stock but experienced a net outflow of $10,000 in financing activities due to debt repayment and dividends paid. This suggests a balanced approach between equity financing and debt management.
- Improved Liquidity: The net increase in cash of $40,000 led to an ending cash balance of $50,000. This notable improvement in liquidity enhances the company’s ability to meet short-term obligations and pursue future investment opportunities.
As a business owner, this statement reveals your company’s ability to generate and manage cash, balance investments, and maintain a healthy financial position.
How To Prepare A Cash Flow Statement
- Start with the Beginning Cash Balance
- Start the cash balance at the end of the preceding period as the starting point.
- Calculate Cash Flow from Operating Activities
- Subtract non-cash expenses, such as depreciation from net income.
- Working capital adjustment (eg, accounts receivable, inventory, accounts payable etc).
- Calculate Cash Flow from Investing Activities
- Record all the cash transactions related to the long-term assets.
- Sum up the cash used for purchasing and cash received from selling assets.
- Calculate Cash Flow from Financing Activities
- Record all cash flows related to equity and debt.
- Add cash generated from the sale of its stock as well as through borrowing money, and subtract cash paid for repaying loans and paying dividends.
- Calculate the Net Increase/Decrease in Cash
- Sum up all the operating cash flows, investing cash flows and financing cash flows.
- Determine the Ending Cash Balance:
- Add net increase/decrease in cash to the beginning cash balance to obtain the ending balance.
Cash Flow Statements Vs. Other Financial Statements
- Cash Flow Statement vs. Income Statement
- An income statement demonstrates a company’s financial performance in a given period and expresses it in terms of revenues and expenses giving the net profit or loss.
- The cash flow statement only deals with cash inflow and outflow during a specific period and does not factor in non-cash accounting items such as depreciation.
- Cash Flow Statement vs. Balance Sheet
- The balance sheet gives a general view of the company’s financial standing at a certain time and it discloses the assets, liabilities and shareholders’ equity.
- The cash flow statement is a statement of the movement of cash over a period and it gives a dynamic view of cash management.
Important Notes for Cash Flow Statement
One of the reasons why preparing a cash flow statement is important is because it provides information on a company’s liquidity and cash management.
It is divided into three main sections: activities that relate to operating, investing and financing.
The statement is useful in decision-making regarding the company’s financial health.
The cash flow statement is crucial for evaluating a business’s capability to generate and utilize cash to fulfill all business requirements.
It provides information that income statements and balance sheets do not offer.
Regular analysis of the cash flow statement helps with effective financial planning and management.
Thus, knowing how to work and read the cash flow statement will help every business to ensure there is good cash flow which is crucial as it provides the necessary funding for operations, growth, and in case of financial challenges.