The Cash Flow Statement is the third core financial statement, alongside the Income Statement and Balance Sheet. It tracks the actual movement of cash into and out of a business during a reporting period.
It reconciles net income (from the Income Statement, based on accrual accounting) with cash on hand (from the Balance Sheet, a real resource).
Purpose
- Shows Liquidity: Reveals whether a business can generate enough cash to sustain operations.
- Highlights Solvency: Demonstrates ability to meet debts, pay dividends, and reinvest.
- Clarifies Accrual Distortions: Adjusts for non-cash items (e.g., depreciation, unrealized gains) so stakeholders see true cash position.
- Decision Tool: Used by investors and creditors to assess financial health beyond paper profits.
Structure
The statement is divided into three sections:
- Operating Activities
- Cash from core business operations.
- Adjusts Net Income for:
- Non-cash expenses (depreciation, amortization)
- Changes in working capital (receivables, inventory, payables).
- Shows if the business generates sustainable cash from its main activities.
- Investing Activities
- Cash used for or generated by long-term investments.
- Purchases and sales of property, plant, equipment, or securities.
- Reveals how much is being reinvested for growth.
- Financing Activities
- Cash from owners and creditors.
- Issuing or repurchasing stock, borrowing or repaying debt, paying dividends.
- Shows how the company funds its operations and returns capital.