Complete Guide To Corporate Finance


Financial Statements - 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 shows the following:

  • How the company obtains and spends cash
  • Why there may be differences between net income and cash flows
  • If the company generates enough cash from operation to sustain the business
  • If the company generates enough cash to pay off existing debts as they mature
  • 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:

  • Operating activities
  • Investing activities
  • 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, or through 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

A cash flow statement looks like this:

Reporting Non-Cash Investing and Financing Transactions
Information for the preparation of the statement of cash flow 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.

Find out more about the cash flow statement in the following articles:

Financial Statements: Cash Flow

Fundamental Analysis: The Cash Flow Statement

Cash Flow From Investing

The Essentials Of Corporate Cash Flow

What Is A Cash Flow Statement?

Types Of Taxes
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