What is a Cash Flow Statement?

what-is-a-cash-flow-statementThe cash flow statement gives insight how cash has been generated and used over the period. The reader of an annual report can tell by comparing the end of year cash balance with the beginning of year cash balance what the change in cash over the year is. However, this information is not very revealing by itself.

For example, a decline in the cash balance does not necessarily mean it was a ‘bad’ year. A decline in cash could be due to repaying a loan or investing in new assets.

The cash flow statement shows the change in cash over the period as the sum of cash generated/used by three categories: cash from operating, investing and financing activities.

Cash from operating activities shows how much cash has been generated by daily operations. It is equal to cash received from customers minus cash paid to suppliers, cash paid to employees, interest paid, and other operating items. A positive operating cash flow shows that the business has generated cash. A negative operating cash flow means that cash has been used during the period. Start-up companies usually have negative operating cash flows.

Cash from operating activities shows the balance of cash that has been invested in long term assets and cash received from disinvestments (selling long term assets).

Cash from financing activities shows the cash flows related to the financing of the companies. It equals the cash inflows for attracting funding by issuing shares or obtaining new loans and the cash outflows for repaying loans, paying out dividends, etcetera.

The example cash flow statement below is based on the previous example. The entries in the column ‘cash’ in the worksheet (40,000, -8,000, -500, etcetera) are organized by type: operating, investing and financing cash flows. Since the corporation is newly incorporated, the beginning of period cash is zero. Hence, the change in cash equals the end of period’s cash balance.

Cash Flow Statement Example


The cash flow statement is discussed in more detail in the cash flow statement.

Statement of Cash Flows Explained

Key points:

– a negative cash flow means cash has been used

– a positive cash flow means cash has been generated

– the cash flow statement shows operating cash flow, investing cash flow and financing cash flow which add up to the change in cash over the period

– operating cash flow is cash generated/used by day-to-day operations

– investing cash flow is cash generated/used with (dis)investing in/of long term assets

– financing cash flow is cash generated/used with the funding of the company (issue shares, new debt, paying dividend or repaying debt)

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