What is a Cash Flow Statement?

A cash flow statement, also known as a statement of cash flow, is a type of financial statement that focuses on the movement of cash in and out of a business.  It shows how much cash a company spends and receives, and the sources for both.

The cash flow statement is a major financial record that helps show the health and performance of a business. It displays where and how a company spends its cash, and helps to establish liquidity—how much of its money is readily available to pay its expenses and debt obligations.

Elements of a cash flow statement

The cash flow statement focuses on the use of cash and cash equivalents in a business. These include actual cash, currencies, and short-term accounts and assets that can immediately be spent as cash, or quickly converted to cash if needed.

The cash flow statement consists of three main parts.

Cash flow from operating activities

Cash flow from operating activities include the money that a company makes and spends while engaging in the core aspects of its business, such as:

• Sales receipts from products and services sold;
• Accounts receivable and accounts payable;
• Expenses for raw goods and materials;
• Expenses for salaries, utilities, rent, and other administrative or property costs;
• Interest or tax payments.

Cash from investing activities

Cash from investing activities includes the money gained or lost from a company’s investments, such as:

• Sales or purchases of property, production space, equipment, or other long-term assets;
• Sales or purchases of stocks, bonds, and other securities;
• Proceeds or losses from company mergers, sales, or acquisitions.

Cash from financing activities

The cash from financing activities includes paid to or obtained from investors and banks, such as:

• Issuing or repayment debt;
• Stock buybacks;
• Stock dividends.

Each of these sections will have its own balance, which are then added together to arrive at a company’s total cash flow for the time period in question.

Calculation of Cash Flows

When calculating the operating portion of cash flows, businesses will typically use one of two methods:

• The direct cash flow method, which focuses purely on the cash the business has paid and received.
• The indirect cash flow method, which adjusts for things like accounts receivable, where a sale has been made and can be counted as revenue, but has not technically been paid yet.

Either method is part of generally accepted accounting principles (GAAP), and can be used by businesses, as long as it is used consistently across accounting practices.

How a cash flow statement is used

The cash flow statement is a useful counterpart to the balance sheet and income statement, since it shows how cash is actually going in and out of a business. It provides another perspective on net income, where revenue and expense numbers may not have been actually paid yet. A business that is liquid is generally regarded as healthier than one that is not, but not all low or negative cash flows are necessarily bad, as they could signal outlays to expand operations.