What is the Cash Flow Statement?

The cash flow statement is a measure of a company's financial health.  The cash flow statement differs from these other financial statements because it acts as a kind of corporate checkbook that reconciles the balance sheet and income statement.  The cash flow statement records the company's cash transactions, both the inflows and outflows, during the given period.  While an income statement can tell you whether a company made a profit, a cash flow statement can tell you whether the company generated cash.  It shows whether revenues booked on the income statement have actually been collected.  At the same time, however, the cash flow does not necessarily show all the company's expenses.  Not all expenses the company accrues have to be paid right away.  So even though the company may have incurred liabilities it must eventually pay, expenses are not recorded as a cash outflow until they are paid.


The most commonly used format for the cash flow statement is broken down into three sections: 


  1. Cash flows from operating activities.  These flows are related to your principal line of business and include the cash receipts from sales or for the performance of services, payroll and other payments to employees, payments to suppliers and contractors, rent payments, payments for utilities, and tax payments.
  2. Cash flows from investing activities.  These are capitalized as assets on the balance sheet.  Investing activities also include investments that are not part of your normal line of business.  These cash flows could also include purchases of property, plant and equipment, proceeds from the sale of property, plant and equipment, purchases of stock or other securities other than cash equivalents, and proceeds from the sale or redemption of investments.
  3. Cash flows from financing activities.  These flows relate to the businesses debt or equity financing.  They include proceeds from loans, notes, and other debt instruments, installment payments on loans or other repayment of debts, cash received from the issuance of stock or equity in the business, and dividend payments, purchases of treasury stock, or returns of capital.


Cash for purposes of the cash flow statement normally includes cash and cash equivalents.  Cash equivalents are short-term, temporary investments that can be readily converted into cash, such as marketable securities, short-term certificates of deposit, treasury bills, and commercial paper.  The cash flow statement shows the opening balance in cash and cash equivalents for the reporting period, the net cash provided by or used in each one of the three categories just described, the net increase or decrease in cash and cash equivalents for the period, and the ending balance.

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