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A cash flow statement is a financial statement that provides a summary of how a company manages its cash position over a specific period of time. It shows the inflows and outflows of cash and cash equivalents, categorising them into operating, investing, and financing activities.
What is a cash flow statement?
The primary purpose of a cash flow statement is to provide a detailed account of how changes in a company’s balance sheet and income statement affect its cash and cash equivalents. It helps stakeholders, including investors, creditors, and management, understand how the company generates and uses cash.
There are three main categories:
- Operating activities: This section includes cash flows from the core business operations of the company.
- Investing activities: This section covers cash flows from activities that involve long-term assets.
- Financing activities: This section focuses on cash flows from transactions with the company’s owners and creditors.
The cash flow statement is a vital analytical tool for financial analysts, as it helps in evaluating the quality of a company’s earnings and its capacity to generate sustainable cash flows, and it provides insights into a company’s ability to withstand economic downturns or unforeseen financial challenges by showing its liquidity and cash flow management.
Example of cash flow statement
| Inflows: Software licensing fees: Sale of equipment: Issuance of new shares: Outflows: Payments to suppliers and expenses: Employee salaries: Utilities and rent; Investment in R&D project: Purchase of computer servers: Repayment of loan: Payment of dividends: | $500,000____ $30,000 $150,000 $270,000 $50,000 $20,000 $100,000 $40,000 $50,000 $30,000 |
| Net increase in cash: | $190,000 |
| Beginning cash balance: | $300,000 |
| Ending cash balance: | $490,000 |
This simplified cash flow statement demonstrates how cash is generated and used by a company in its activities during a specific period.
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