Cash Flow Statement: Purpose, Example, Prepare & How to Read


If you’re a business owner or entrepreneur, it can help you understand business performance and adjust key initiatives or strategies. If you’re a manager, it can help you more effectively manage budgets, oversee your team, and develop closer relationships with leadership—ultimately allowing you to play a larger role within your organization. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Therefore, it does not evaluate the profitability of a company as it does not consider all costs or revenues.

  • Therefore, cash is not the same as net income, which includes cash sales as well as sales made on credit on the income statements.
  • The most common and consistent of these are depreciation, the reduction in the value of an asset over time, and amortization, the spreading of payments over multiple periods.
  • After accounting for all of the additions and subtractions to cash, he has $6,000 at the end of the period.
  • If the inventory payment is paid by cash, then the increase in the value of inventory is subtracted from net sales.
  • 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.
  • Current and potential lenders and investors are also interested in the company’s cash flows.

Cash flows also track outflows and inflows and categorize them by the source or use. The cash flow statement serves a crucial role in providing comprehensive financial information about a company’s liquidity and cash management. It goes beyond the traditional income statement and balance sheet by organization 2020 focusing specifically on the movement of cash within a given period, typically a fiscal year. The primary purpose of a cash flow statement is to shed light on how a company generates and uses its cash resources, providing valuable insights into its financial health and operational efficiency.

The Importance of Cash Flow

CFO indicates whether or not a company has enough funds coming in to pay its bills or operating expenses. The cash flow statement is one of the required external financial statements. Analysts use the cash flows from financing section to determine how much money the company has paid out via dividends or share buybacks.

  • Therefore, information about an organization’s payables and receivables are of key importance.
  • If the purchases are made on credit, then there would be an increase in accounts payable in the balance sheet.
  • The cash flow statement is a financial document that gives a snapshot of the company’s cash flow, that is cash and cash equivalents flowing in and out of a company.

Increase in Accounts Receivable is recorded as a $20,000 growth in accounts receivable on the income statement. We begin with reasons why the statement of cash flows (SCF, cash flow statement) is a required financial statement. If the starting point profit is above interest and tax in the income statement, then interest and tax cash flows will need to be deducted if they are to be treated as operating cash flows.

Net increase/(decrease) in cash and closing cash balance

Sometimes, a negative cash flow results from a company’s growth strategy in the form of expanding its operations. The statement of cash flows is particularly important when an acquirer is reviewing the financial statements of a potential acquiree. The acquirer does not want to pay a price that cannot be supported by the cash flows of the acquiree, so it uses the statement in order to confirm the amount of cash flows generated. The purpose of a cash flow statement is to provide a detailed picture of what happened to a business’s cash during a specified period, known as the accounting period. It demonstrates an organization’s ability to operate in the short and long term, based on how much cash is flowing into and out of the business. The statement of cash flow gives insights, help an investor to understand the status of a company’s operations, from where the money is coming, and how efficiently the money is utilized.

The statement is essential as it assists investors to understand whether an organization financial status is reliable or not. A cash flow statement (CFS) is a financial statement that captures how much cash is generated and utilized by a company or business in a specific time period. To calculate cash flow from investing activities, add the cash generated from selling assets and then deduct capital expenditures. The resulting forecast can suggest, for example, whether a business might need to cut expenses or increase sales to maintain positive cash flow. It can also indicate potential cash shortfalls due to delayed payments, as well as guide decision-making for cost management or possible expansion. Cash flow analysis involves more than just calculating cash flow and reviewing the cash flow statement.

What Is the Difference Between Direct and Indirect Cash Flow Statements?

For example, an income statement can record the depreciating value of an asset as a loss but the net cash on hand will remain unaffected if it’s already paid for. A cash flow statement is not a standalone document but an essential piece in the puzzle of financial analysis. It complements other financial reports, such as the income statement and balance sheet, to provide a holistic view of a company’s financial performance. Mastering the complexities of cash flow statements empowers both businesses and investors to make well-informed decisions, laying the foundation for a resilient and sustainable financial future.

Cash From Investing Activities

It’s about understanding what may be behind those figures and identifying trends over time. A company is generally considered financially healthy if it consistently has more cash inflows than outflows. However, a more nuanced assessment involves the operating cash flow ratio, which reflects a company’s ability to repay its debts. Staying on top of cash flow is essential to ensure smooth day-to-day business operations. At the same time, careful cash flow management helps companies build sufficient reserves to weather peaks and troughs in sales, late invoice payments, or unexpected expenses.

By learning how to read a cash flow statement and other financial documents, you can acquire the financial accounting skills needed to make smarter business and investment decisions, regardless of your position. In the above example, the business has net cash of $50,049 from its operating activities and $11,821 from its investing activities. It has a net outflow of cash, which amounts to $7,648 from its financing activities. This method measures only the cash received, typically from customers, and the cash payments made, such as to suppliers.

Cash Flow Statement: How to Read and Understand It

Clearly, the exact starting point for the reconciliation will determine the exact adjustments made to get down to an operating cash flow number. Companies with strong financial flexibility fare better in a downturn by avoiding the costs of financial distress. While the direct method is easier to understand, it’s more time-consuming because it requires accounting for every transaction that took place during the reporting period. Most companies prefer the indirect method because it’s faster and closely linked to the balance sheet. However, both methods are accepted by Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The starting cash balance is necessary when leveraging the indirect method of calculating cash flow from operating activities.