A cash flow statement is a financial report that details how cash flows i.e. entered and left a business during a reporting period. It shows how a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses. It also complements the income statement and the balance sheet by showing how cash moved in and out of the business.
The cash flow statement is divided into three sections:
- Cash flows from operating activities: This section shows the cash generated or used by a company’s core business activities, such as sales, purchases, salaries, taxes, etc. It reflects how much cash is available from the company’s operations1.
- Cash flow from investing activities: This section shows the cash spent or received by a company’s investments in long-term assets, such as property, plant, equipment, securities, etc. It reflects how much cash is invested or divested by the company.
- Cash flow from financing activities: This section shows the cash raised or paid by a company’s financing activities, such as issuing or repaying debt, issuing or repurchasing equity, paying dividends, etc. It reflects how much cash is obtained or returned to the company’s shareholders and creditors1.
There are two methods of preparing a cashflow statement: the direct method and the indirect method. The direct method shows the actual cash inflows and outflows from each activity, while the indirect method starts with net income and adjusts it for non-cash items and changes in working capital2. Most companies use the indirect method because it is easier to prepare and reconcile with the income statement.