Cash Flow Statement Example and Components

Cash Flow Statement Overview

The cash flow statement shows a company's money flow in and out over a fixed period of time.  Most companies report their cash flow statement on a quarterly or monthly basis.  The cash flow is broken out into three reporting areas: (1) Operating, (2) Investing, and (3) Finance.  The cash flow statement was originally known as the flow funds statement or statement of changes in financial position. 

Purpose of the Cash Flow Statement

The cash flow statement is intended to provide information on a firm's liquidity or solvency.  The cash flow provides a clear understanding of a company's financial resources at a given point in time.

Operating Activities

Operating activities represents the incoming and outgoing cash activities to run the day-to-day operation of a business.  The net cash flow from operating activities represents the monies made from the sales of products and services.  These are items include receipts from goods sold, tax payments, and interest received from loans.  The operating activities is the most critical component of the cash flow statement, because it shows if a company is able to turn a profit based on its current business model at this exact moment in time.  If a company is unable to turn a profit from their business activities, odds are the company will be experiencing finance issues and or making investments in hardware or software without any proof of success. 

Investing Activities

Investment activities represent the cash flow from the purchase of long term assets required to make or sell goods and services.  Investment activities also include purchases of stocks or other securities.  A major issue that potential investors have with the investing activities section is that the money listed here represents activities paid for in cash.  So, if a company were to purchase $5 million dollars worth of equipment with only $1 million cash and $4 million in financing, only the $1 million will show up under investing activities. 

Financing Activities

Financing cash flow is related to money in and out to investors and shareholders.  When a company raises funds from bonds or stock, this is considered cash in.  While dividends paid out to investors and interest paid to bond holders is considered cash out.

Example of a Cash Flow Statement

Cash provided (or used) by:
Operating Activities$XXX
Investing Activities$XXX
Financing Activities$XXX
Net increase (decrease) in cash and cash equivalents$XXX
Cash and cash equivalents at beginning of year$XXX
Cash and cash equivalents at end of year$XXX

Summary

A cash flow provides an investor insight into a company's credit worthiness and overall financial health.  While for a company the cash flow is one of the major components for budgeting efforts and future planning.

 

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