Cash flow statement
A company's cash flow statement provides an overview of all cash-related activities for a given period of time. It includes operating activities such as depreciation and changes in liabilities, investing activities such as capital expenditures, and activities such as paying dividends or buying or selling stock.
"Follow the money." You'll hear TV detectives say this all the time, when they're tracking down someone who might benefit from a crime. But it's equally important to you when you want to keep track of a business's performance.
The cash flow statement shows you, the investor or analyst, how cash is moving through a business. It reconciles net income, which is a non-cash GAAP number, with the actual cash coming into or leaving the business. It shows what the company is doing with its cash; where that cash is from; and how much of it stays within the business at the end of the reporting period.
On this statement, any negative number is cash flowing out of the business (such as buying inventory), while any positive number is cash flowing into the business (such as taking out a loan).
Important point: Interim cash flow statements -- those reported between either end of the company's fiscal year, such as in the second or third quarter -- are cumulative from the end of the previous year. In order to determine the various cash flows for that quarter alone, you'll need to subtract the figures from the previous quarter's statement.
The cash flow statement is broken down into three sections, which are always presented in this order:
- operating activities,
- investing activities, and
- finance activities.
Cash from operating activities
For this presentation, this section begins with net income and then adjusts for any and all non-cash income or expenses, ending with cash flow from operations. Adjustments include the following:
- stock-based compensation, and
- working capital changes, which includes changes to:
Depending on the nature of the item or the direction of the change in the balance sheet accounts, these items are either added or subtracted to net income. After all of that, you are left with net cash from operating activities.
Beginning with revenue, this method adds or subtracts all cash expenses (such as salary payments, inventory purchases, or cash receipts from accounts receivable). It ends up at net cash from operating activities. This will be the same amount found by using the indirect method. In fact, if a company reports using the direct method, it must also supply the indirect method as a supplementary report (FAS 95).
Cash from investing activities
This section shows all the cash the business spent on or received from investments. You will see things like capital expenditures, purchase (or sale) of marketable securities, and acquisitions of other businesses.
Cash from financing activities
This section details how the company is raising additional cash (such as from debt or issuing stock) as well as sharing cash with investors (paying dividend) or using cash to pay back debt or for share repurchase. Adding all that up we are left with net cash from financing activities.