Definition
The cash flow statement is a financial accounting report that demonstrates how cash flows both into and out of a company. Cash flow statements provide investors and analysts with insights into the change in cash and cash equivalents in a given accounting period.
Calculation
Net Cash Flow = Cash Flow from Operations + Cash Flow from Investing + Cash Flow from Financing
Note: While the above calculation shows three additive elements, the cash flow from investing and financing activities are oftentimes negative values.
Explanation
Also known as the statement of cash flows and funds flow statement, a company's cash flow statement connects information that appears on both the balance sheet as well as the income statement. There are three main categories appearing in this report:
Operations: begins with net income then adjusts for non-cash expenses such as depreciation, amortization, and deferred income taxes. Includes changes to balance sheet items such as inventories, accounts receivable, as well as accounts payable and other liabilities.
Investing Activities: includes the purchase or sale of assets, capital expenditures, dividends received, and the net change to other investments such as marketable securities.
Financing Activities: consists of money received when issuing long term debt, payment of dividends, repurchases or sales of company stock, and repayment of loans.
Companies with foreign operations may also report the effect currency exchange rates have on their cash position.
The cash flow statement helps investors and creditors to gain insights into the liquidity position of a business. It also provides for a better understanding of the company's true operating performance, since it eliminates the effects of the company's chosen accounting method.
Example
The table below summarizes the information appearing on Company A's cash flow statement:
Net Income | $4,283,000 |
Depreciation | $1,236,000 |
Accounts Receivable | -$196,000 |
Inventory | -$196,000 |
Other Operating Activities | $157,000 |
Total Cash from Operating Activities | $5,284,000 |
Capital Expenditures | -$1,379,000 |
Investments | -$745,000 |
Other Investing Activities | -$594,000 |
Total Cash from Investing Activities | -$2,718,000 |
Dividends Paid | -$1,555,000 |
Shares Repurchased | -$1,799,000 |
Net Borrowings | -$307,000 |
Other Cash from Financing Activities | -$50,000 |
Total Cash Flow from Financial Activities | -$3,711,000 |
Effect of Exchange Rate Changes | -$50,000 |
Change in Cash and Cash Equivalents | -$1,195,000 |
Related Terms
The accounting term financial statement refers to a series of documents that reflect the collection and summary of accounting data. Financial statements include the balance sheet, income statement, cash flow statement, and the statement of retained earnings.
Moneyzine EditorJanuary 18th, 2024
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.Moneyzine EditorJanuary 8th, 2024
The income statement is a financial accounting report that demonstrates how net income, or profit, is derived from revenues. The main categories appearing on an income statement include revenues, cost of goods sold, operating expenses, non-recurring items and net income.Moneyzine EditorJanuary 22nd, 2024
The financial accounting term cash and cash equivalents refer to a company's assets that can be quickly turned into cash; these will be the company's most liquid holdings. Cash and cash equivalents appear in the current assets portion of the company's balance sheet.Moneyzine EditorJanuary 10th, 2024- The financial investing term operating cash flow refers to the money a company is able to generate through normal business operations. Operating cash flow (OCF) is a metric that's closely tracked by both the company's financial decision makers as well as investor-analysts.Moneyzine EditorSeptember 20th, 2023
The financial investing term free cash flow refers to the money a company is able to generate after subtracting the costs necessary to maintain and expand the business. Free cash flow (FCF) is a metric that's closely tracked by both the company's financial decision makers as well as investor-analysts.Moneyzine EditorJanuary 18th, 2024
The term free cash flow per share is used to describe a profitability metric that divides a company's free cash flow by the number of common shares outstanding. Free cash flow per share is thought to be the premier measure of a company's financial flexibility, which is their ability to react to unexpected expenses and investment opportunities.Moneyzine EditorJanuary 18th, 2024
