Cash Flow Statement

What is a Cash Flow Statement?

A cash flow statement is a financial statement that outlines the cash inflows and outflows of a business over a given period of time. It is typically presented alongside other financial statements such as an income statement and balance sheet. This statement provides an understanding of how cash is being moved throughout the company and helps to provide key insights into the financial health of the firm.

The cash flow statement is divided into three main sections: operating activities, investing activities, and financing activities. Operating activities generally refer to cash received and spent on regular operations. Investing activities are associated with the purchase or sale of assets within the company or invested into external ventures. Finally, financing activities relate to transactions involving shareholders, debtors, or any outside sources of financing.

Operating Activities

Operating activities revolve around the regular operations of the business and typically entail cash flowing out (if, say, money is spent on raw materials or labour services) and in (such as when customers pay for goods or services) of the company. This section of the cash flow statement usually provides the clearest indication of daily business operations.

Investing Activities

Investing activities are associated with one-off investments that the company makes over a specific period of time and relate to the procurement and divestiture of long term assets such as buildings, vehicles and equipment. This section of the cash flow statement will help to provide an understanding of the types of investments the company is making.

Financing Activities

Finally, financing activities refer to all sources of funds that are obtained by the company, either through issuing debt or obtaining capital from shareholders, and are used primarily for long term investments. This section helps track the company's long term investments.

Why is the Cash Flow Statement Important?

The cash flow statement is an important financial tool used by investors to gain insight into a business's financial health. It is critical to assess the inflows and outflows of a company in order to identify any concerning trends in its financial management. Cash flows can be used to make predictions about the future cash flows of the company, which could be used for investment decisions or debt repayments. Additionally, they can provide an understanding of how much cash the firm currently has available for future investments.

Furthermore, understanding the company's financial activity is necessary for properly assessing the performance of the company and interpreting financial ratios. For instance, debt-to-equity ratios rely on accurate information regarding cash flows. This will inform investors as to the degree of financial leverage and the company's control over their debts.

Example: Microsoft Cash Flow Statement

For a more concrete example, here's an Cash Flow Statement from Microsoft :

Microsoft Cash Flow Statement

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