What is a Cash Flow Statement ?

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The cash flow statement is one of the major financial statements that equity investors look at when they analyze an investment opportunity. The statement displays how much cash is going in and out of the company within a given period of time.

Takeaways

  • Cash flow statement records every cash that is given in and spent out of the company in a given period of time. 
  • The key components of a cash flow statement include operating activities, financing activities & investing activities

Why are Cash Flow statements important ?

Companies can have a high net income but still suffer from a shortage in cash if they fail to adequately manage their cash flows. This might happen if the company sells its products to its customers on extended credit. Although the sale is considered in the revenues and profits, the company hasn’t yet received the actual cash.

That’s why cash flow statements are critical for companies to keep track of their cash inflows and outflows so they can know how much net cash is available in the company during the reporting period. 

What are the different components of the cash flow statement ? 

Cash flows are classified into three categories (Operating activities, investment activities & financing activities). 

Operating activities

The cash flow from operating activities provides the amount of cash made from the core business activity over a period of time. It starts with net income then eliminates the non-cash expenses (such as depreciation, accounts payable and receivables).  A successful business must generate most of its cash from operating activities. 

The result is known as “Cash flow from operating activities”.

Investing activities


Investing activities are changes in the medium and long-term investing activities of a company (also known as non-current assets). This includes the sale/purchase of equipment, buildings or securities. These assets are considered resources that would generate future income and cash flow for the company. 

The difference between cash inflows and outflows is known as “cash flow from investing activities”

Financing activities

Financing activities are either cash inflows that the company gets from borrowing money through debt financing or raising capital, or can be cash outflows through repayment of debt, distributing dividends or repurchasing the company shares “share buyback”.

The difference between cash inflows and outflows is known as “cash flow from financing activities”
 

The sum of all cash flows calculated from the three different activities is the net cash flow that the company has and represents its liquidity capacities.

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