Financial Statements - Cash Flow Statement Basics

Statement of Cash Flow
The statement of cash flow reports the impact of a firm's operating, investing and financial activities on cash flows over an accounting period. The cash flow statement is designed to convert the accrual basis of accounting used in the income statement and balance sheet back to a cash basis.

The cash flow statement will reveal the following to analysts:

  1. How the company obtains and spends cash
  2. Why there may be differences between net income and cash flows
  3. If the company generates enough cash from operation to sustain the business
  4. If the company generates enough cash to pay off existing debts as they mature
  5. If the company has enough cash to take advantage of new investment opportunities

Segregation of Cash Flows
The statement of cash flows is segregated into three sections:

  1. Operating activities
  2. Investing activities
  3. Financing activities

1. Cash Flow from Operating Activities (CFO)
CFO is cash flow that arises from normal operations such as revenues and cash operating expenses net of taxes.

This includes:

  • Cash inflow (+)
    1. Revenue from sale of goods and services
    2. Interest (from debt instruments of other entities)
    3. Dividends (from equities of other entities)
  • Cash outflow (-)
    1. Payments to suppliers
    2. Payments to employees
    3. Payments to government
    4. Payments to lenders
    5. Payments for other expenses

2. Cash Flow from Investing Activities (CFI)
CFI is cash flow that arises from investment activities such as the acquisition or disposition of current and fixed assets.

This includes:

  • Cash inflow (+)
    1. Sale of property, plant and equipment
    2. Sale of debt or equity securities (other entities)
    3. Collection of principal on loans to other entities
  • Cash outflow (-)
    1. Purchase of property, plant and equipment
    2. Purchase of debt or equity securities (other entities)
    3. Lending to other entities

3. Cash flow from financing activities (CFF)
CFF is cash flow that arises from raising (or decreasing) cash through the issuance (or retraction) of additional shares, short-term or long-term debt for the company's operations. This includes:

  • Cash inflow (+)
    1. Sale of equity securities
    2. Issuance of debt securities
  • Cash outflow (-)
    1. Dividends to shareholders
    2. Redemption of long-term debt
    3. Redemption of capital stock

Reporting Noncash Investing and Financing Transactions
Information for the preparation of the statement of cash flows is derived from three sources:

  1. Comparative balance sheets
  2. Current income statements
  3. Selected transaction data (footnotes)

Some investing and financing activities do not flow through the statement of cash flow because they do not require the use of cash.

Examples Include:

  • Conversion of debt to equity
  • Conversion of preferred equity to common equity
  • Acquisition of assets through capital leases
  • Acquisition of long-term assets by issuing notes payable
  • Acquisition of non-cash assets (patents, licenses) in exchange for shares or debt securities

Though these items are typically not included in the statement of cash flow, they can be found as footnotes to the financial statements.

Cash Flow Computations - Indirect Method


Related Articles
  1. Professionals

    Cash Flow

    Learn all about the cash flow statement.
  2. Options & Futures

    Financial Statements: The System

    By David Harper (Contact David)Financial statements paint a picture of the transactions that flow through a business. Each transaction or exchange - for example, the sale of a product or the ...
  3. Markets

    Fundamental Analysis: The Cash Flow Statement

    By Ben McClureThe cash flow statement shows how much cash comes in and goes out of the company over the quarter or the year. At first glance, that sounds a lot like the income statement in that ...
  4. Fundamental Analysis

    Analyze Cash Flow The Easy Way

    Find out how to analyze the way a company spends its money to determine whether there will be any money left for investors.
  5. Fundamental Analysis

    Cash Flow From Operating Activities

    Cash flow from operating activities is a section of the Statement of Cash Flows that is included in a company’s financial statements after the balance sheet and income statements.
  6. Fundamental Analysis

    Cash Flow From Investing

    Cash flow analysis is a critical process for both companies and investors. Find out what you need to know about it.
  7. Fundamental Analysis

    Cash Flow From Financing Activities (CFF)

    Cash flow from financing activities is typically the third and final section of the statement of cash flows. It shows changes to cash resulting from activities such as issuing stocks and bonds ...
  8. Term

    Cash Flow Statement and Financial Health

    A cash flow statement records the amounts of cash and cash equivalents entering and leaving a company.
  9. Investing Basics

    Analyze Cash Flow The Easy Way

    Cash flow statements reveal how a company spends its money and where that money comes from.
  10. Markets

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
RELATED TERMS
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out ...
  2. Cash Flow From Financing Activities

    A category in the cash flow statement that accounts for external ...
  3. Cash Flow From Operating Activities ...

    Cash Flow From Operating Activities (CFO) is an accounting item ...
  4. Non-Operating Cash Flows

    Cash flows (inflows and outflows) that are not related to the ...
  5. Cash Flow From Investing Activities

    An item on the cash flow statement that reports the aggregate ...
  6. Operating Cash Flow Margin

    A measure of the money a company generates from its core operations ...
RELATED FAQS
  1. What is the purpose of drawing up a cash flow statement?

    Understand the reasons behind why a company draws up a cash flow statement. Learn how it is used to understand the trends ... Read Answer >>
  2. How is cash flow from operating activities calculated?

    Discover why cash flow from operating activities is significant to businesses, and learn the direct and indirect methods ... Read Answer >>
  3. What are some examples of cash flow from operating activities?

    Learn about the cash flow statement and cash flows from operating activities, and observe some examples of cash flows from ... Read Answer >>
  4. What is the difference between cash flow and free cash flow?

    Learn about the main differences between cash flow and free cash flow. In addition to the differences, learn how to calculate ... Read Answer >>
  5. How do I determine cash flow investing activities for a publicly traded company?

    Learn how cash flows from investing activities are calculated, which sources and uses of cash are included in this section, ... Read Answer >>
  6. What is the difference between cash flow and fund flow?

    See how cash flow and fund flow differ from each other, and why fund flow can be used very differently by accountants and ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center