Cash Flow Statement In Detail

What Is Cash Flow Statement?

A cash flow statement is a type of financial statement that provides aggregate data regarding all cash inflows that a company receives from its ongoing operations as well as external investment sources. Cash inflows can come from a variety of different sources. In addition to this, it takes into account any and all cash outflows incurred during the specified time period to cover the costs of business activities and investments.


A Cash Flow Statement, which may also be referred to as the Statement of Cash Flows, is a financial document that summarises an organization's cash flows over a specified time period. When building a three-statement model, analysts primarily use the income statement as one of the financial statements to use. The operating activities, investing activities, and financing activities of a company are organised into the three primary categories that make up a cash flow statement. These categories are organised in the following order: (1) operating activities, (2) investing activities, and (3) financing activities.


Table Of Content

Why Cash Flow Statement Important?

What is Negative Cash Flow Vs. Positive Cash Flow

A) Negative Cash Flow

B) Positive Cash Flow


Direct vs. Indirect Method of Cash Flow Statement

Direct Method

Indirect Method


The Three Elements of the Statement of Cash Flows

A- Operating Cash Flow

1) Net Income

2) Depreciation and Amortization (D&A)

3) Changes in working capital

4) Cash from operations

Important Tip


B- Investing Cash Flow

1) Investments in Property and Equipment or Capital Expenditure

2) Cash Used For Acquisitions

3) Cash from investing


C- Financing Cash Flow

1) Issuance (repayment) of debt

2) Issuance (repayment) of equity

3) Cash from financing


D- Cash Balance

1) Net Increase (decrease) in Cash and Closing Cash Balance

2) Opening cash balance


What are The Pros and Cons of Cash Flow Statement

A- Pros of Cash Flow Statement

B- Cons of Cash Flow Statement


Why Cash Flow Statement Important?

The statement of cash flows tells you how much cash went into and out of a company during a particular period of time such as a quarter or a year. You might be wondering why there is a need for such a statement because it sounds very similar to the income statement, which details the amount of money that was spent on expenses in comparison to the amount of money that was brought in from sales.

The difference is based on a complicated idea that's referred to as accrual accounting. The use of accrual accounting requires businesses to record their revenues and expenses at the time the corresponding transactions take place, rather than waiting until cash is actually transferred. Although this explanation may appear to be straightforward, the reality is much more complicated, and the statement of cash flows is what helps investors make sense of it all.


Investors place a high level of importance on a company's statement of cash flows because it reveals the total amount of cash that a business has actually generated. The income statement, and the other hand, often includes non-cash revenues or expenses, which the statement of cash flows excludes.

You should consider a potential investment's ability to generate cash as one of the most important characteristics to look for in that investment. Many companies have shown profits on the income statement but fell later because of insufficient cash flows. A good look at the statement of cash flows for those companies may have warned investors that rough times were ahead.


What is Negative Cash Flow Vs. Positive Cash Flow


A) Negative Cash Flow

A negative cash flow indicates that, during a given time period, your cash expenditures were greater than your cash receipts; however, this does not necessarily mean that you did not make a profit. Instead, a negative cash flow may be caused by a mismatch between the amount of money being spent and the amount of money being brought in. This issue needs to be resolved as soon as possible.

It is important to analyse changes in cash flow from one period to another because these changes can indicate how well a company is performing overall. Negative cash flow may also be caused by a company's decision to expand the business and invest in future growth.


B) Positive Cash Flow

A company is said to have positive cash flow if, over some period of time, the amount of money flowing into the company is greater than the amount of money flowing out of the company. This is the best possible circumstance to be in because having a surplus of cash enables the company to reinvest in itself and its shareholders, settle debt payments, and investigate new avenues through which the company can expand its operations.


The presence of positive cash flow does not, however, guarantee the existence of a profit. Your company may generate a profit even if it does not have a positive cash flow, and conversely, you may have a positive cash flow even if it does not generate a profit.



Direct vs. Indirect Method of Cash Flow Statement

A) Direct Method

The direct method does not begin with the calculation of net income as its starting point; rather, it specifically lists the cash that was received and paid out to third parties throughout the period in question (e.g. cash from customers or cash to suppliers).


B) Indirect Method

When using the indirect method, which is by far the more common approach, the line item that is used as the starting point is the net income. This figure is then adjusted for non-cash items (such as depreciation and amortisation) as well as changes in working capital in order to calculate cash flow from operations.


The Three Elements of the Statement of Cash Flows

The statement of cash flows is broken up into three sections because there are numerous ways in which businesses can acquire cash and put it to use. These sections are: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

Walmart Inc. - Cash Flow Statement Analyst Interview
Walmart Inc. - Cash Flow Statement


Let’s Understand The Important Break Down Of Cash Flow Statement


A- Operating Cash Flow

The Cash Flow from Operating Activities section comes first on the statement of cash flows. The first step is to determine the net income or loss, then adjust that number so that it corresponds to the total cash flow figure. This is done by either adding to or subtracting from the original amount. Changes in the account balances of items that can be found on the balance sheet in the current assets and current liabilities categories, as well as non-cash accounts, are what are added or subtracted in accounting (e.g., stock-based compensation). The next number that we consider is the cash equivalent of a company's net income.


1) Net Income

This figure represents the final total at the bottom of an income statement. A company's profitability over a given time period can be determined by looking at its net income or earnings. It is determined by beginning with total revenues and deducting from those totals both COGS and total expenses, which include depreciation, selling, general, and administrative costs as well as interest and other expenses.


2) Depreciation and Amortization (D&A)

When utilised in a business, a number of assets see a gradual decline in value over time. As a consequence of this, D&A expenses are those that distribute the cost of an asset over the period of time that it will be useful. The term "amortisation" refers to the process of writing down the value of intangible assets such as patents, copyrights, goodwill, and software, whereas "depreciation" refers to the process of writing down the value of tangible assets such as buildings, machinery, and equipment. In the income statement, D&A will result in a lower net income. However, due to the fact that these are non-cash expenditures, we have to add this back into the cash flow statement in order to adjust the net income. In other words, there are no monetary exchanges that take place.


3) Changes in working capital

Difference between a company's current assets and current liabilities is what's meant to be referred to as its "working capital." The cash balance in operating activities is affected by any changes that occur in the current assets (other than cash) and current liabilities.

For instance, an increase in a company's current assets occurs whenever the company purchases additional inventory. Because it is considered an outflow of cash, the positive change in inventory that occurred is deducted from the business's net income. The situation is the same with regard to accounts receivable. If it goes up, that indicates that the company sold more of their products on credit. Due to the absence of a cash transaction, the amount of accounts receivable has been deducted from the business's overall net income.

On the other hand, an increase in a current liability item such as accounts payable is regarded as a cash inflow by the company because it results in the company having more cash available for use in the operation of the business. After that, the total for this is added to the net income.


4) Cash from Operations

After making all of the necessary corrections, we can finally determine the amount of net cash that was generated by the operating activities of the company. This is not a substitute for the company's net income; rather, it is a synopsis of the amount of cash that is generated from the company's primary operations.


In order to Understand Cash Flow From Operating Activities, Here Are Some Important Tips

If balance of an asset Goes UP, cash flow from operations will Goes Down.

If balance of an asset Goes Down, cash flow from operations will Goes UP.

If balance of a liability Goes UP, cash flow from operations will Goes UP.

If balance of a liability Goes Down, cash flow from operations will Goes Down.


B- Investing Cash Flow

This section of the statement of cash flows is referred to as the Cash Flow from Investing Activities and reports any shifts that have occurred in the company's long-term investments or capital expenditures (CapEx). The term "CapEx" can also refer to the acquisition of assets such as property, plant, or equipment. Investing for the long term may involve purchasing debt or equity instruments issued by other companies. Acquisitions of other businesses constitute yet another significant component of this section. One of the most important things to keep in mind is that any change that occurs in the long-term assets section of the balance sheet is reflected in the cash flow statement under the heading "investing activities."


1) Investments in Property and Equipment or Capital Expenditure