What Is a Cash Flow Statement?

What Is a Cash Flow Statement?

Let me explain what a cash flow statement really is. It's a financial statement that shows you how much cash is coming into and going out of a business over a specific period. You'll find it one of the most straightforward financial statements because it tracks the cash generated through operating, investing, and financing activities. Remember, companies have to file these statements to stay compliant with financial regulators.

How Cash Flow Statements Work

Every company that sells stock to the public has to file financial reports with the Securities and Exchange Commission (SEC). You should know the four main financial statements: the balance sheet, which details assets, liabilities, and shareholders’ equity; the income statement, showing revenue and expenses; the statement of shareholders’ equity, tracking changes in shareholder interests; and the cash flow statement, which reveals all cash inflows and outflows to give insight into company transactions.

Cash flow statements let you see a company's financial well-being through its cash movements. Inflows come from operations and investments, while outflows cover business activities and investments in a period. There are two accounting methods for this: accrual accounting, used by most public companies, recognizes income when earned and expenses when incurred, not when cash changes hands—this makes the income statement different from actual cash position; and cash accounting, which records income and expenses only when cash is received or paid, and that's what the cash flow statement focuses on.

Even profitable companies can fail if they don't manage cash flow properly, which is why this statement matters to investors and analysts. For instance, if a company sells on credit, it books revenue but doesn't have the cash yet, still paying taxes on that profit—do this too much, and you run out of cash despite profits. Investors, use good judgment when looking at working capital changes, as companies might manipulate cash flow before reporting.

How a Cash Flow Statement Is Organized

The cash flow statement breaks down into three main parts: operations, investing, and financing. Each part has its own section, helping you evaluate a company’s stock or overall value. The total from these is net cash flow.

Cash Flows From Operations

This first section covers cash from operating activities, starting with net income and adjusting noncash items to reflect cash operations—essentially, it's net income in cash terms. It reports inflows and outflows from main business activities like buying inventory, paying salaries, but not investments or dividends. Companies need positive operational cash flow for growth; otherwise, they seek financing. For example, accounts receivable increases sales but not cash, so it's deducted from net income. This section also handles accounts payable, depreciation, amortization, and prepaid items without cash flow.

Cash Flows From Investing

The investing section shows cash from investment gains, losses, and spending on property or equipment—it's where you spot capital expenditure changes. Rising capital expenditures usually reduce cash flow, but that can signal investment in growth, common in expanding companies. Positive cash here, like from selling assets, is fine, but investors prefer operations as the main source.

Cash Flows From Financing

This section overviews cash in financing, tracking flows between the company, owners, and creditors from debt, equity, stocks, bonds, or loans—reported annually in the 10-K. Analysts use it to see dividend payouts or buybacks and how cash is raised for growth. Positive financing cash means more inflows than outflows; negative might indicate debt repayment, dividends, or buybacks.

The Bottom Line

To wrap this up, the cash flow statement has three key sections: operations, investments, and financing. Even with accrual accounting in place, it focuses on cash accounting, so you can assess a company's performance effectively. Investors like me prefer cash flow mainly from operations, as that's the core of any business.