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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.

Expanded Definition

"Follow the cash." It is an important statement in crime-solving for tracking down who benefits in a crime and an equally important statement in tracking the performance of a business.

The cash flow statement shows you, the investor or analyst, how cash is moving through the 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 the cash, where that cash is from, and how much 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).

Given an income statement and a balance sheet, it is possible to construct the cash flow statement.

Important point: Interim cash flow statements, that is those reported between ends of the company's fiscal year such as 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 also need the previous quarter's statement and do a bunch of subtractions of one from the other.

The cash flow statement is broken down into three sections and are always presented in this order:

  • operating activities,
  • investing activities, and
  • finance activities.

Cash from operating activities

This is presented in two different ways. The indirect method, followed by most U.S. companies begins with net income, while the direct method, followed by many foreign companies, begins with revenue.

Indirect method

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:

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.

Direct method

Beginning with revenue, it adds or subtracts all cash expenses (such as salary payment or inventory purchases or cash receipts from accounts receivable). At the end is 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.

Summing up

The net cash from all three sections are then added up to calculate the net change in cash which reflects the change in cash and equivalents on the balance sheet.

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