Cash Flow Statements Explained: Definition and Examples

Cash Flow Statements Explained: Definition and Examples

A cash flow statement measures how well a company manages its cash position.

What is a cash flow statement?

A cash flow statement measures how well a company manages its cash position. In other words: Does the business bring in enough cash to pay its debt obligations and fund its expenses? Even profitable companies may not manage their cash flow well, which is why a cash flow statement is an indispensable tool for companies, analysts, and investors.

Investors look closely at how a company’s operations are running, how its cash is being spent, and where that money is coming from. A company’s creditors will want to know how liquid a business is—meaning, how much cash or assets that can quickly be converted to cash it has on hand. 

Management needs to know how much cash the business currently has and expects to have in the future, so they can raise capital or make changes in operations before cash runs out. 

The cash flow statement is one of three financial statements all companies use. Together with the income statement and the balance sheet, the three reports paint a comprehensive picture of a company’s assets, liabilities, profits and losses, and income. Every line item and number on the cash flow statement can be calculated using the income statement and the balance sheet

How to read a cash flow statement

There are three parts in every cash flow statement: operating activities, investing activities, and financing activities. Being able to understand how these impact cash in and cash out helps companies more efficiently manage their cash.

1. Operating activities

The operating activities measure all the cash that’s coming in and going out tied to business operations. Cash comes in when customers pay their bills ,and cash goes out when the company pays its vendors and suppliers.

At the top, you’ll always start with net income. This is the same number that’s at the bottom of the income statement, and that’s how these two statements are tied together. Net income is a company’s total profits—but that’s not the same as cash. To calculate cash, a company must take the net income number and make adjustments to it in order to reflect the cash the company physically has on hand. 

Adjustments to reconcile net income to cash generated by operating activities include: 

For cash flow from operations, net income is converted into cash by adjusting that income for the timing of cash entering or exiting a company’s bank account.

Changes in operating assets and liabilities include: 

Operating activities on Apple’s 2018 cash flow statement.

Investing activities

The investing section measures the cash that the company is spending on its future; for example, buying delivery trucks or opening a new manufacturing facility would consume cash now, but these are the types of investments that will hopefully generate more cash in the future. When a company buys assets, it uses up cash, and when it sells assets, it generates cash. This section reflects all the plusses and minuses from buying and selling assets. 

The first three inflows and outflows are cash related to marketable securities, which are stocks and bonds that the company owns. This includes: 

The next lines include:

Investing activities on Apple’s 2018 cash flow statement.

Financing activities

The financing activities section measures how much the company is being powered by outside capital from lenders or shareholders versus its own profits. These are all the plusses and minuses from debt and equity transactions. If a company issues stock, it generates cash. If it raises debt, it generates cash. In the same way, if it buys back stock or pays off debt or even pays dividends to shareholders, that’s cash going out. The financing activities section gives you visibility into all of that.

The first four items are all about stock: issuing it, paying off dividends, a company buying back its stocks:

The last three items are about debt: 

Financing activities on Apple’s 2018 cash flow statement.

Negative cash flow

Contrary to what you might instinctively think about cash flows, a dip in cash may not signal problems in a company. A negative cash flow may be attributable to a company’s decision to expand at a certain point, for growth in the future. This is why it is important to analyze changes in cash flow from one period to the next: that way, investors and creditors can spot both trends and one-off events that will give them a better idea of how the company is performing over time.

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