Cash Flow Statement
April 17, 2025
What is a Cash Flow Statement?
The cash flow statement is one of the key financial statements a company needs to prepare in line with US GAAP and IFRS. It presents the cash flows for the designated period and it reconciles to the cash and cash equivalents number on the balance sheet.
The cash flow statement shows a company’s ability to generate cash and meet any future cash flow obligations all within a given time period e.g. quarterly, annually. Unlike the income statement, which is based on accrual accounting (transactions are reported when income or earnings are recognized, not when cash is received), a cash flow statement will instead show the movement of cash.
Components of a Cash Flow Statement
The cash flow statement can be broken down into four main components which summarize the cash flows from Operating, Investing and Financing activities, as well as the reconciliation of Net Cash Flow to cash and cash equivalents.
Example of a Cash Flow Statement
This example of a cash flow statement shows the typical layout for a US company when filing a 10K or 10Q cash flow statement.
The Coca-Cola Company – Cash Flow Statement
Key Learning Points
- The cash flow statement measures changes in cash and cash equivalents for the period
- The balance sheet is the best guide to produce a cash flow statement – the change in every line items must be included in the cash flow statement
- There are three categories of cash flow: Operating, Investing and Financing flows
- Assets have an inverse relationship with cash flow while liability and equity items have a direct cash flow relationship
- The net cash flow is reconciled to cash and cash equivalents in the balance sheet
Preparing a Cash Flow Statement
To prepare a cash flow statement, you need to categorize balance sheet accounts into cash flows from Operations, Investing, and Financing.
Start by calculating changes in balance sheet items not captured by reconciliations, such as changes in inventory, accounts payable, and accounts receivable. For more complex items, perform reconciliations using BASE analysis (beginning, add, subtract, ending). Summarize operating working capital lines into one summary line if needed. Finally, bring all sections together to get the net cash flow and ending cash in the balance sheet.
What are Operating Cash Flows?
Operating cash flows are those produced and used by the operations of the business. These activities are directly related to providing the actual product or service. It does not include cash flows which are part of the overall running of the business such as Investing or Financing. Creating an operating cash flow is critical when determining how successful a business or division is within a company. Ideally the company’s core business should be the main producer of cash for the company, and preferably generating more cash flow each year!
Direct and Indirect Method
There are two methodologies to present these cash flows; the direct method and the indirect method. The former is rare in practice as most businesses present operating cash flows using the indirect method.
The cash flow section begins with net income reported from the income statement and it is then adjusted for the impact of non-cash items, such as sales made on credit or depreciation expenses.
For the majority of businesses, the cash flows from operations should be positive year on year since the future of the business is in jeopardy if these are negative on an ongoing basis. A positive operating cash flow shows that the business is making sales and generating cash for the company.
What are Investing Cash Flows?
The second section of the statement presents cash flows invested in the future of the business or released by divesting long-term assets. This section includes the purchase of PP&E and other capex expenses.
An analyst would expect the cash flows relating to investing activities to be negative since this is usually a cash outflow as the company spends money investing in its operations. The business should be buying new assets or investing to improve operations. Spending here suggests that the company is growing by continuing to invest in its future operations.
A positive cash flow in this section would suggest the company is divesting its long-term assets. Generally, significant asset divestment should not be undertaken on a regular basis and investors would prefer the company to generate positive cash flows through its operations rather than investing activities. There may be times when capital is designated for investment purposes but generates a short-term income before it is deployed but otherwise this is usually an outflow.
What are Financing Cash Flows?
Cash flows from financing activities record the flows to and from the providers of both equity and debt financing. This section can be positive or negative depending on the relative amounts of issuance or redemption in a given period. A positive financing cash flow number shows money is coming into the business rather than flowing out. Negative cash flow indicates the company is paying debt holders or paying dividends. This will depend on how much debt a company has taken on (and the rates it will be paying to service this debt). This will come under investor scrutiny in term of the company’s net debt and also uses of cash.
Analysts also review this section to determine how much money a business has paid out to its shareholders in the form of dividends. This section is a good indication of how a company raises capital to fund its operations.
Reconciliation of Net Cash Flows
The final section of the statement shows the net cash flow or the sum of the operating, investing and financing flows. When added to the cash and cash equivalents at the start of the period it should equal the ending amount in the balance sheet. In other words, the cash flow explains the change in cash and cash equivalents between the prior period and the current period end.
Download a free Financial Edge Cash Flow Template and practice the steps needed to categorize company cash flows.
Analyzing the Cash Flow Statement
There are many things that can be looked at on the cash flow statement. Firstly it is attractive for an investor if a company can report a highly positive cash flow. This means that the company can then choose to: invest further in the business, increase its dividend, buy back stock, reduce its liabilities in the form of debts or acquire another company
It will now be possible to compare the net income with cash from operating activities. A higher value for cash due to operating activities than net income will tend to mean a higher quality of earnings.
The cash flow statement will also establish a company’s growth profile. Very fast-growing or start-up businesses will often have negative operating and investing cash flows, and these will be financed by the cash flow from financing. Mature businesses will often have very positive cash flow from operations, small negative cash flow from investing (supporting maintenance capex), and very negative cash flow from financing, as funds are repatriated to investors.
Common Indicators and Red Flags
Common indicators of a healthy cash flow statement include consistent positive cash flow from operations, prudent investment in long-term assets, and manageable levels of debt.
Red flags to watch out for include negative cash flow from operations, excessive reliance on debt financing, and significant discrepancies between net income and cash flow from operations.
Conclusion
Cash flow analysis is an invaluable tool when looking at a company and its underlying operations. Companies that generate cash from operations will be looked on favorably by investors. How a company uses that cash, either in investing or financing activities, will reveal what underlying financial commitments and obligations it has.
Being able to successfully create a cash flow statement that links to a balance sheet and income statement for the same period is a key tool for analysts.