What Is a Cash Flow Statement? Cash Flow Statements Guide

A cash flow statement is a financial document that shows the reader the amount of cash and cash equivalents that are coming into and going out of a company. A cash flow statement (also known as a statement of cash flows) has been a requirement for a business’ financial reports since 1987 per the Financial Accounting Standards Board.

Cash flow statements have very similar formats, but they come in two basic styles: direct method and indirect method. In a direct method cash flow statement, every time cash comes in or goes out from the company, it’s listed on the statement. The indirect method, the one used for all financial modeling, uses the accounting line items to determine the cash flow in a given period.

Cash flow statements are important because they show investors, both potential and existing, how the company handles its cash inflows and cash outflows (also called the operating cash flows) to pay off debts and to fund future endeavors. The result is the net cash flow for the company, which shows its liquidity (cash assets).

Cash flow statements also provide good insight into the company’s financial health. By seeing how the company operates and what its current cash balance is, you can estimate future cash flows to try to determine if the company will have a negative cash flow or positive cash flow in the future.

A cash flow statement has three distinct components for an accounting period, each one with a specific role to play:

1. 1. Cash from operating activities: This shows the reader how much cash the company’s sales generate, whether from a product it sells or a service it offers. It also shows how much cash has gone out for things like raw materials for products and other cash transactions or cash payments. Accounts payable is also in this section, as are things like income tax.
2. 2. Cash from investing activities: This section of the cash flow statement lists activities related to companies’ investments. It also includes loans, payments, as well as purchases or sales. This section can also contain information about repurchases of stocks.
3. 3. Cash from financing activities: This section deals with financing from investors and banks, such as loans. Additionally, if the company decides to pay dividends for stocks, it’s included in this part of the cash flow statement.

Looking at a company’s income statement on the cash flow statement can give you a good idea of how it’s doing and its cash position. Cash transactions show how much money the company is taking in, and once deductions are taken away, it can tell you whether or not it has enough cash to be profitable and possibly make some dividend payments.

A cash flow statement for a specific period might include cash flow from operations activities, including net income, depreciations, and any increases in accounts receivable; the cash flow from investing activities, including capital expenditures; and cash flow from financing activities, such as stock purchases and payments on debt.

You can look at each individual section of a cash flow statement—the cash flow from operating activities, for example—to see if the resulting subtotal is positive or negative. And you can look at the final number on the balance sheet to see if it’s positive or negative. Positive numbers could be a sign the company is healthy. On the other hand, if the balance sheet says the company’s cash situation is in the negative, it might be an indicator that the company’s cash flow is poor.

There are three basic formulas companies use to determine cash flow to gain a better understanding of the company’s financials.

1. 1. Free cash flow (FCF): This is the simplest and most common formula to determine cash flow because all of the information required for the formula is in other financial statements. First, you need to know the operating cash flow. The second item is the capital expenditures. The equation then looks like this: Operating cash flow - capital expenditures = free cash flow.
2. 2. Cash flow forecast (CFF): To calculate cash estimates that will come in and go out over a period of time—your estimated cash position—use this formula: Starting cash + projected cash in - projected cash out = ending cash flow.
3. 3. Operating cash flow (OCF): Operating cash flow is the type of calculation a lender would want to see prior to giving you a loan. This measure from your cash flow statement shows how your cash flow operates on a regular basis. The formula is: Operating income + depreciation - taxes + changes in working capital = operating cash flow.

All investments and investment strategies entail inherent risks and introduce the potential for financial loss or the depreciation of assets. The information presented in this article is for educational, informational, and referential purposes only. Consult a professional investment advisor before making any financial commitments.

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