The statement of cash flows, also known as the cash flow statement, is a financial statement that provides insights into the cash inflows and outflows of a company over a specific period. It categorizes cash flows into three main activities: operating, investing, and financing. Here are the key parts of the statement of cash flows:
- Operating Activities:
- Purpose: This section reports cash flows related to a company’s core business operations. It shows how cash is generated or used in the day-to-day running of the business.
- Content: Operating cash flows typically include cash received from customers, cash paid to suppliers, employee salaries, interest income, and interest paid.
- Key Metrics: The net cash provided by or used in operating activities is calculated by subtracting cash paid from cash received. It is a crucial indicator of a company’s ability to generate cash from its primary operations.
- Investing Activities:
- Purpose: This section reveals cash flows related to a company’s investments in assets, such as property, equipment, and marketable securities, or cash received from the sale of these assets.
- Content: Investing cash flows include cash spent on capital expenditures (e.g., buying machinery), cash received from the sale of investments, and loans to other companies.
- Key Metrics: The net cash provided by or used in investing activities reflects how a company is investing in its future growth and managing its assets.
- Financing Activities:
- Purpose: This section shows cash flows related to a company’s financing activities, including transactions with its shareholders and creditors.
- Content: Financing cash flows include cash received from issuing stock, cash paid to repurchase shares, cash received from borrowing (e.g., loans), and cash paid as dividends to shareholders.
- Key Metrics: The net cash provided by or used in financing activities demonstrates how a company raises capital and manages its relationships with investors and creditors.
- Net Cash Flow: The statement of cash flows concludes with the calculation of the net change in cash and cash equivalents over the specified period. This figure is the difference between the cash inflows and outflows from all three categories (operating, investing, and financing activities).
- Beginning and Ending Cash Balance: The statement typically includes the beginning and ending cash and cash equivalent balances, allowing readers to see how much cash the company had at the start and end of the reporting period.
- Reconciliation: To ensure that the statement of cash flows is in line with the company’s balance sheet, there is often a reconciliation section that explains the adjustments made to reconcile the change in cash and cash equivalents with the beginning and ending cash balances.
The statement of cash flows is a critical financial document because it provides a clear picture of how a company manages its cash resources. It helps stakeholders assess a company’s liquidity, its ability to meet its short-term obligations, and its long-term financial stability. Additionally, it allows investors, creditors, and management to evaluate the sources and uses of cash, enabling better financial decision-making.