Cash Flow Statement | Explanation | AccountingCoach (2024)

Introduction to the Cash Flow Statement

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The cash flow statement is the name commonly used by practicing accountants for the statement of cash flows or SCF. We will use these names interchangeably throughout our explanation, practice quiz, and other materials.

The cash flow statement is required for a complete set of financial statements.

The SCF reports the cash inflows and cash outflows that occurred during the same time interval as the income statement. The time interval (period of time) covered in the SCF is shown in its heading. Two examples include “Year ended December 31, 2023” and “Three months ended September 30, 2023”.

The amounts on the SCF provide the reasons for the change in a company’s cash and cash equivalents during the period covered. For simplicity, we will assume that the company does not have cash equivalents. Therefore, our SCF will explain the change in the company’s cash from the beginning of the year to the end of the year (or the beginning of the quarter to the end of the quarter, etc.). Given our assumption that the company does not have cash equivalents, the following is a skeleton of the SCF’s format:

The cash flows from operating activities section provides information on the cash flows from the company’s operations (buying and selling of goods, providing services, etc.). With the most likely used indirect method, the starting point of this section is the company’s net income. It is followed with adjustments to convert the amount of net income from the accrual method to the cash amount.

The cash flows from investing activities lists the cash flows associated with the purchase and sale of noncurrent (long-term) assets such as investments and property, plant and equipment.

The cash flows from financing activities section reports the cash flows associated with the issuance and repurchase of a corporation’s bonds and capital stock, the payment of dividends, and the borrowing and repayment of short-term and long-term loans.

At the bottom of the SCF (and other financial statements) is a reference to inform the readers that the notes to the financial statements should be considered as part of the financial statements. The notes provide additional information such as disclosures of significant exchanges of items that did not involve cash, the amount paid for income taxes, and the amount paid for interest.

We begin with reasons why the statement of cash flows (SCF, cash flow statement) is a required financial statement.

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Why the Cash Flow Statement is Required

The accounting profession realizes that reading only one or two financial statements is not sufficient for understanding a company’s finances and operations. Accordingly, the generally accepted accounting principles (GAAP, US GAAP) require that the statement of cash flows be part of a set of financial statements distributed outside of a company. A complete set of financial statements consists of five financial statements and the notes to the financial statements:

  • Income statement
  • Statement of comprehensive income
  • Balance sheet
  • Statement of stockholders’ equity
  • Statement of cash flows
  • Notes to the financial statements

While the income statement amounts make the news, the amounts are based on the accrual basis of accounting. This method of accounting best measures a company’s sales, expenses, and earnings during a short time interval. However, the income statement does not measure and report the amounts of cash that flowed in and out of the company. For example, the income statement does not report the following:

  • Cash collected from sales. (The cash might be collected from customers 45 days after the sale.)
  • Cash paid for goods sold. (Payment may have been made many months prior to their sale.)
  • Cash paid for buildings and equipment that will be expensed over the next 5 to 30 years.
  • Cash received from the sale of long-term assets
  • Cash received from bank loans
  • Cash payments to reduce a loan’s principal balance
  • Cash withdrawn by owners or cash dividends paid to stockholders

A company’s understanding of its cash inflows and outflows is critical for meeting its short-term and long-term obligations to its suppliers, employees, and lenders. Current and potential lenders and investors are also interested in the company’s cash flows.

Financial analysts will review closely the first section of the cash flow statement, cash flows from operating activities. Part of the review consists of comparing this section’s total (described as net cash provided by operating activities) to the company’s net income. This is done to see whether the revenues, expenses, and net income reported on the income statement are consistent with the change in the company’s cash balance.

If they are not consistent, they will seek to uncover the root causes for the differences. Perhaps the company’s inventory is no longer in demand or is being returned by customers. Perhaps receivables are not being collected, and so on. (In short, the analyst believes that “Cash is king”. While there can be some leeway in applying accounting principles, there is no leeway when it comes to reporting the amount of cash.)

Lastly, the SCF provides the cash amounts needed in some financial models.

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Example of a Cash Flow Statement

The following is an example of the statement of cash flows, which is commonly referred to as the cash flow statement or SCF. (The company and the amounts shown are hypothetical.)

The heading for Example Corporation’s statement of cash flows indicates that the amounts occurred during the year January 1 through December 31, 2023.

In bold font you see subheadings for the three sections of the SCF. Many corporations omit “Cash flows from” and simply show the following as the subheadings:

  • Operating activities
  • Investing activities
  • Financing activities

Some amounts are shown in parentheses, while other amounts are not. We will cover these in detail later, but let’s introduce the technique by looking at the amounts shown for investing activities:

  • The amount (300,000) communicates that cash of $300,000 was paid out, was a cash outflow, or that it reduced the company’s cash balance. Parentheses can also be thought of as having a negative or unfavorable effect on the company’s cash balance.

  • The amount 40,000 indicates that cash of $40,000 was received, was a cash inflow, or that it increased the company’s cash balance. Amounts without parentheses can also be thought of as having a positive or favorable effect on the company’s cash balance.

  • The (260,000) is described as the net cash used for investing activities. “Net” means the combination of the cash outflow of (300,000) and the cash inflow of 40,000.

The amount 92,000 shown on the line Net increase in cash during the year is the combination of each section’s sum: 262,000 + (260,000) + 90,000. Since this net amount or grand total is a positive amount, it is shown without parentheses and is described as net increase in cash during the year.

Note that the net increase (or net decrease) in cash during the year is combined with the cash at the beginning of the year to show the cash at the end of the year. In our example, it is 92,000 + 101,000 = $193,000. The end of the year balance of $193,000 should agree with the cash balance on the company’s balance sheet for December 31, 2023.

Lastly, at the bottom of all financial statements is a sentence that informs the reader to read the notes to the financial statements. The reason is that not all business transactions can be adequately expressed as amounts on the face of the financial statements.

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Cash Flow Statement | Explanation | AccountingCoach (2024)

FAQs

What is the cash flow statement? ›

A cash flow statement is a financial statement that shows how cash entered and exited a company during an accounting period. Cash coming in and out of a business is referred to as cash flows, and accountants use these statements to record, track, and report these transactions.

What is an example of a cash flow? ›

What is a cash flow example? Examples of cash flow include: receiving payments from customers for goods or services, paying employees' wages, investing in new equipment or property, taking out a loan, and receiving dividends from investments.

How to calculate cash flow? ›

To calculate operating cash flow, add your net income and non-cash expenses, then subtract the change in working capital. These can all be found in a cash-flow statement.

What four things a cash flow statement tells you? ›

They show you changes in assets, liabilities, and equity in the forms of cash outflows, cash inflows, and cash being held. Those three categories are the core of your business accounting. Together, they form the accounting equation that lets you measure your performance.

What is the most important number on a statement of cash flows? ›

Regardless of whether the direct or the indirect method is used, the operating section of the cash flow statement ends with net cash provided (used) by operating activities. This is the most important line item on the cash flow statement.

How do you prepare a statement of cash flows? ›

Four Steps to Prepare a Cash Flow Statement
  1. Start with the Opening Balance. ...
  2. Calculate the Cash Coming in (Sources of Cash) ...
  3. Determine the Cash Going Out (Uses of Cash) ...
  4. Subtract Uses of Cash (Step 3) from your Cash Balance (sum of Steps 1 and 2)

What is cash flow for dummies? ›

Cash flow is the movement of cash into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time, and can be used to measure rates of return, actual liquidity, real profits, and to evaluate the quality of investments.

Is cash flow the same as profit? ›

Profit is defined as revenue less expenses. It may also be referred to as net income. Cash flow refers to the inflows and outflows of cash for a particular business. Positive cash flow occurs when there's more money coming in at any given time, while negative cash flow means there's more money out.

Is cash flow a payment? ›

Cash flow is defined as the incomings and outgoings of cash pertaining to the operating activities of a business. For example, a business' incomings are the receivables (payments) from customers and clients, while its outgoings are its expenses, such as payroll and leasing office space.

What is a good cash flow? ›

At its most basic, positive cash flow is when cash inflows are higher than cash outflows in a given period. Essentially, this means that more cash is coming into your business than going out of your business.

How to improve cashflow? ›

9 ways to improve cash flow
  1. Start with accurate cash flow forecasting.
  2. Plan for different scenarios and understand the challenges of your industry.
  3. Consider your one-day cash flow value.
  4. Provide cash flow training for your team.
  5. Communicate effectively within your business.
  6. Make sure you get paid promptly.
Jun 2, 2023

How to create cash flow? ›

Here are eleven strategies to help generate a positive cash flow:
  1. Bootstrap the Business.
  2. Talk With Vendors to Negotiate Terms.
  3. Save on Production Cost with Technology.
  4. Delay Expenses.
  5. Start a Partner Referral Program.
  6. Have Operating Assets.
  7. Send Invoices Early.
  8. Check Your Inventory.

What does a healthy cash flow statement look like? ›

The statement shows how a company raised money (cash) and how it spent those funds during a given period. It's a tool that measures a company's ability to cover its expenses in the near term. Generally, a company is considered to be in “good shape” if it consistently brings in more cash than it spends.

What is a cash flow statement in simple words? ›

The cash flow statement shows the source of cash and helps you monitor incoming and outgoing money. Incoming cash for a business comes from operating activities, investing activities and financial activities.

Does interest income go on a cash flow statement? ›

Interest paid and interest and dividends received are usually classified in operating cash flows by a financial institution. taxes are generally classified as operating activities.

How do you interpret the cash flow statement? ›

To interpret your company's cash flow statement, start by looking at the inflows and outflows of cash for each category: operating activities, investing activities, and financing activities. If all three areas show positive cash flow, your business is likely doing well (although there are exceptions).

What are the three main statements of cash flow? ›

A company's cash flow is the figure that appears in the cash flow statement as net cash flow (different company statements may use a different term). The three main components of a cash flow statement are cash flow from operations, cash flow from investing, and cash flow from financing.

Why is cash flow important? ›

Your operating cashflow shows whether or not your business has enough money coming in to pay operating expenses, such as bills and payments to suppliers. It can also show whether or not you have money to grow, or if you need external investment or financing.

What is the monthly cash flow statement? ›

The primary aim of the monthly cash flow report is to present an overview of the financial activity experienced throughout the month. Organizations rely on monthly cash flow statements to closely monitor cash inflows and outflows. Typical users of the cash flow report are CFOs, controllers, and accountants.

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