What is a Statement of Cash Flows? (Accompanied by examples)

A cash flow statement (CFS) provides details about the amount of money a company was able to generate or lose over a specific time period. It provides valuable information about an organization’s liquidity, solvency condition, and state of financial health.

However, its essence is cash flow, and understanding how to read a cash flow statement could help you, in turn, make better-informed financial decisions.

This guideline will explain the basics of a cash flow statement and provide examples of how to prepare a satisfactory one.

Definition of Cash Flow Statement

The cash flow statement explains the company’s funds flowing into and out of its coffers over a given reporting period (usually quarterly or annually). It is one of the three most fundamental financial statements, otherwise called a record of loss and benefit.

Unlike the other two statements, which focus on gains and losses, CFS shows how much cash a company has generated from all its operational investing and financing activities.

While it may appear that a company is realizing profits when filling out its income statement, the cash flow can halt simply due to late payments by clients or mismanagement of current inventory.

Just like its name suggests, your cash flow statement can be broken down into three parts:

The cash flow statement has three main sections: operating activities, financing activities, and investing activities.

Operations

Operating activities: cash flows from operating or main profit-generating business activity like sales and purchases of goods; (cash generated) outflow from operating activities of the company on a daily basis

A few of the use cases are supplier payments, customer money collection, employee wages, etc.

Investing Activities

Cash flow for an investing activity involves the purchase or disposal of assets such as property, plants, and equipment; other long-term investments; security deposits, etc. This section reflects how much cash is being allocated to the purchase or sale of long-term assets.

These include the purchase of new equipment, an old one offloaded, or shares and stocks purchased.

Activities of Financing

The financing activities section involves cash transactions associated with changes in equity or debt. This reflects the amount of cash that the company either receives or spends on financing.

Such examples are the acquisition of a loan (lion), payment of interest (puma), and distribution of profit in the form of dividends, like a cheetah.

Examples of Cash Flow Statements

To further explain what a cash flow statement is, we will provide two examples.

Cash Flow Statement Example 1

XYZ Corp. prints clothing. Here is a summary cash flow statement for the year ended December 31, 2023.

Operating cash flows

$500,000 in cash from customers

Cash to Suppliers: $300,000

Cash wages and compensation: $100,000

$100,000 is the net cash flow from operating activities.

Source of Cash from Investing Activities

Capital Equipment Purchases: $50,000

Investment activities resulted in the use of $50,000 in cash.

Cash Flows from Financial Activities

Issue common stock, $200,000

Dividend payments: $20,000

Net cash from financing activities of $180,000

The net cash flow equals $230,000.

For instance, XYZ Corp.’s operations generated a $100,000 cash inflow, and the business also invested $50,000 in purchasing new equipment. Financing activities, on the other hand, resulted in a $180,000 net increase due to the issue of common stock. Throughout the year, the company’s cash flow was $230,000. This is a good omen since it indicates that there was enough cash to cover all expenses for the company’s functioning and growth. Case 2: XYZ Corp. is a technology company. The following is a simplified statement of cash flow for the year ending December 31, 2023. XYZ Corp.

Cash Flow Statement 

Cash Flows by Operating Activities

Cash received from customers: $200,000 Cash disbursed to suppliers: $150,000 Net Operating Activities: $50,000

Case 2: XYZ Corp.’s cash flows from operating activities depicted in the CFS show a negative; XYZ Corp. has utilized more cash flows from operating activities than earned.

Cash Flow from Investing Activities 

Cash: $100,000 for the acquisition of property and equipment; net $100,000; no cash used in investing activities

Case 2 has negative investing cash flows of $100,000, as depicted in this CFS. This is because the company did not have sufficient cash to cover the cost of acquiring new equipment from its operating activities.

Cash Flows from Financial Activities

Long-term debt issued: $50,000 Repayment of short-term edges: negative 20,000 Net financing activities: $30,000 Net cash flows: $230,000 – $50,000 – $100,000 – $30,000 = $20,000 XYZ Corp.’s net cash flow for the year was negative $20,000, as described in Example 2 above.

This reveals a lack of cash flow and that the corporation spends more cash than it generates from operating and investing activities. The company’s operating cash flows could not cover the cost of new equipment, funded by financing activities such as debt issues, as the CFS suggests.

The methodology for calculating financial flows:

Calculation of Cash Flow Statements

Direct and indirect procedures are the two available approaches. Sharing the same objectives, it would be expected that they should also calculate similarly when compared to the life cycle. Before you do the important activity of financial analysis, it is imperative to know the differences between both.

In addition, even though they both follow GAAP (generally accepted accounting principles), each of these two cash flow styles is more suitable for some types of companies than others. In this article, we will discuss the procedure to select what type of financing cash flow approach fits your business transactions.

Direct method

In a nutshell, the direct method simply requires tracking all cash coming in and going out of your business. We call this method ‘direct’ because it is simple: direct cash movements made during an account period amount to a statement of the financial flow. It does not include things like depreciation and other non-cash transactions. This is about real cash flow instead.

The first one is a direct procedure and includes the following:

• Interest that has been paid
• Customer payments in cash
• Capital expenditures
• Payments to suppliers and others

It focuses not on sales generation but on cash creation. While this method can be used to determine cash flows for financial statements, it is not as common as the indirect method. However, this is mainly because it requires manually entering all cash receipts and can be quite a time-consuming process. But this approach often makes a statement of cash flow more transparent to a non-expert audience.

Indirect method

The indirect approach is often appreciated as less direct than the other one. This method involves calculating the net income from an accounting period by subtracting changes in working capital and non-cash items. Expected depreciation, deferred taxes, etc.

These are not going to have any impact on the net cash flows; hence, they are non-cash items. Changes in working capital are the difference between liabilities and current assets.

Direct cash flow statements vs. indirect cash flow statements

We have noticed differences between the direct and indirect methods. This question meets international financial reporting standards. Apart from the higher prevalence of the indirect method, The direct method is simple to comprehend but can be difficult for an organization with numerous transactions. Generally, implementation of the indirect method is much simpler than that of the direct method, but this tends to occur only when an organization already has a robust understanding of its financial statements.

From there, many important variables will then assist in figuring out the right way to calculate cash flow for your business.

Size of the organization

Your business size will, in large part, shape how you choose to calculate your financial statements. The direct method is preferred by small businesses that have fewer transactions and fixed asset values when determining operating cash flows. Given the work involved in preparing financial statements when many transactions are concerned, it is conceivable that firms with a large daily transaction volume would find their cash flow computed through the indirect method more efficient.

The saving of time and resources

The direct method of cash flow statement, in general, produces more intelligible disclosures that are useful for the interpretation of cash inflows and outflows as well as forecasting future flows. Therefore, if possible, one should consider using this method when producing a financial statement. This would be impossible for time savings in some cases, though. When this is the case, using the indirect method to create your statement of cash flows usually makes more sense since it allows you to prepare everything quicker and doesn’t involve specialized software.

How to read a cash flow statement.

The first step is to know the main concepts, which can realistically enable somebody to quite easily understand a cash flow statement. Now, without further ado, here is how to read a cash flow statement for beginners in 4 easy steps:

• Start with the first part, cash flow from operating activities. This shows the cash received from and paid for in the daily operating activities of a company.
• Move on to the “cash flow from investing activities” section next. This shows the cash that was used to acquire long-term assets or received from the sale of the same.
• The section “cash flow from financing activities” accounts for cash the company uses to finance its operations or anything that it receives as an investment.
• Find the line item at the bottom of this statement that says, “Net increase/decrease in cash.” It shows whether the company’s cash balance changed positively or negatively during that time frame.

The cash flow statement must be compared with the income statement and balance sheet to have an inclusive view of the company’s financial health.

Methods for Cash Flow Statements:

• More details about spending

Unlike the balance sheet or income statement, this presents information on where a company directs its resources, making it more comprehensive. It provides only a limited view as it does not take into account certain cash flows that affect cash (such as repayments of loans). Jenga Unchained This way, businesses will have a clearer view of the situation, and decisions can be taken at a strategic level that guarantees future success with positive cash flow.

• The benefits of planning

The cash flow of a corporation can have a significant impact on its success or failure. Business executives should focus on the following when interpreting a balance sheet to gather information about operating cash flows: how much net income is there, what expenses have gone out, and where accruals were collected. With its accurate statement of cash flows, managers can make both short-term and long-term plans for the business’s well-being, as well as monitor expenditures.

• Operating Capital Viewpoints

Executives need a holistic view of the company’s working capital—how much extra cash they have to spend on making their business better. The income statements are only a shallow look at operating cash flow. It helps business leaders make well-versed cash deployment decisions so their companies can prosper. With positive cash flows, management can refer to the statement of cash available for growth. Conversely, if you are having cash flow difficulties, it may become necessary to lower costs in an effort that will preserve operating income as well.

• Investor objectives

So, equity financing can be an excellent way to raise capital. Use a cash flow statement to showcase that the business is in good shape and nearly certain of dividends for future investors. It shows all crucial financial health indicators, i.e., cash generated, income statement, net profit, etc.

• Traditional financing

Do you want a loan from the bank? Traditional lenders do not only decide to lend you based on the profit and loss statement or even the net income amount. The more stable the cash flow, however, the better the business will be able to perform against any repayment demands of a loan.

• Enhanced financial management

Not having a true picture of what their finances are will get them into trouble very quickly. For businesses or investors, cash flow statements provide a complete picture of how money is coming and going in an organization, displaying outgoings compared to incomings along with a large sum of disposable income that stakeholders can work from.

Tips for Performing a Cash Flow Analysis

• These are some of the practical considerations to keep in mind while analyzing the cash flow statement for any company.
• Compare the cash flow statement for the current period to previous periods to identify any significant changes or trends.
• Especially, the ‘Cash Flow from Operating Activities’ section is significant because it will help in getting a better comprehension and quality of what’s happening at business.
• Look for any red flags, like continuous negative cash flow from operating activities.
• Cash flow forecast to project future cash flows and identify potential barriers.
• The interpretation of the cash flow statement should be done after considering industry and economic factors that may impact how current non-cash items are reflected.
• This is when liquidity—how much current liability the company has relative to its cash inflows and outflows—is assessed. A healthy company will fully cover its short-term obligations with cash.

Regular analysis of cash flow is necessary for businesses to understand their financial health, and not keeping it relevant can lead to unwise decisions. An understanding and analysis of a cash flow statement will help you better gauge how well the company has done as an overall operating business, thus enabling us to make strategic investment decisions.

An essential perspective on business operations

Shareholders, creditors, and potential partners need to understand the cash flow statement of a company. This report offers insight into the financial position of a company and how it strategically handles its cash sources.

In addition, a risk screen and analysis can identify the potential risks or growth opportunities in the statement. Businesses can find ways to better themselves by conducting cash flow statement reviews regularly, which in turn will help workers increase their probability of future success.

So, we need to have a clear idea regarding how to interpret and analyze the cash flow statement of any business or investment, which will help you manage well enough through your investing career.