Gain a deeper understanding about cash flow statements, one of the three key financial statements that report the cash generated and spent during a specific time period. It functions as a bridge between the income statement and balance sheet by showing how money moved in and out of a business.
Key Insights
- Cash flow statements include three sections: Operating Activities, Investing Activities, and Financing Activities.
- Operating activities, the principal revenue-generating actions, include associated cash flows with sales, purchases, and other expenses.
- Items listed on the cash flow statement are not all actual cash flows, but rather reasons why cash flow differs from profit.
- Cash flow from investing activities involves the acquisition and disposal of non-current assets and other investments not included in cash equivalents.
- The money spent on buying property, plant, and equipment (PP&E) is referred to as capital expenditures (CapEx).
- Cash flow from financing activities result in changes in the size and composition of the entity's equity capital or borrowings, including activities such as borrowing and repaying bank loans, issuing and buying back shares, and paying dividends.
Three Sections of Cash Flow
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Operating Activities (CFO)
Cash from core business: net income + D&A + working capital changes.
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Investing Activities (CFI)
CapEx, acquisitions, asset sales, securities purchases.
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Financing Activities (CFF)
Debt issuance/repayment, equity raises, dividends, buybacks.
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Net Change in Cash
Sum of the three sections + beginning cash = ending cash.
Cash Flow Statement is one of the three key financial statements that report the cash generated and spent during a specific period of time. The statement of cash flows acts as a bridge between the income statement and balance sheet by showing how money moved in and out of the business.
Three Sections of the Statement of Cash Flows:
- Operating Activities
- Investing Activities
- Financing Activities
Operating activities are the principal revenue-producing activities of the entity. Cash Flow from Operations typically includes the cash flows associated with sales, purchases, and other expenses.
The items in the cash flow statement are not all actual cash flows, but “reasons why cash flow is different from profit.”
Depreciation expense reduces profit but does not impact cash flow (it is a non-cash expense). Hence, it is added back. Similarly, if the starting point profit is above interest and tax in the income statement, then interest and tax cash flows will need to be deducted if they are to be treated as operating cash flows.
Cash flow from investing activities includes the acquisition and disposal of non-current assets and other investments not included in cash equivalents. Investing cash flows typically include the cash flows associated with buying or selling property, plant, and equipment (PP&E), other non-current assets, and other financial assets.
Cash spent on purchasing PP&E is called capital expenditures (CapEx).
Cash flow from financingactivities are activities that result in changes in the size and composition of the equity capital or borrowings of the entity. Financing cash flows typically include cash flows associated with borrowing and repaying bank loans, and issuing and buying back shares. The payment of a dividend is also treated as a financing cash flow.
Cash Flow statement is useful to investors because, under the notion that cash is king, it allows investors to get an overall sense of the company’s cash inflows and outflows and obtain a general understanding of its overall performance.
Video Transcription:
Full Video Transcript
Cash flow statement is one of the three key financial statements that report the cash generated and spent during a specific period of time. The statement of cash flows acts as a bridge between the income statement and balance sheet by showing how money moved in and out of the business.
Three Sections of the Cash Flow Statement
There are three sections of the statement of cash flows: operating activities, financing activities, and investing activities. Operating activities are the principal revenue-producing activities of the company. Cash flow from operations typically includes the cash flows associated with sales, purchases, and other expenses.
The items in the cash flow statement are not all actual cash flows, but the reasons why cash flow is different from profit. For example, depreciation and amortization expense reduces profit but does not impact cash flow. It is a non-cash expense, therefore it is added back. Similarly, if the starting point profit is above interest and tax in the income statement, then interest and tax cash flows will need to be deducted if they are not treated as operating cash flows.
Financing Activities
Cash flow from financing activities includes activities that result in changes in the size and composition of the equity capital or borrowings of the company. Financing cash flows typically include cash flows associated with borrowing and repaying bank loans, and issuing and buying back shares. The payment of a dividend is also treated as a financing cash flow.
Investing Activities
Cash flow from investing activities includes the acquisition and disposal of non-current assets and other investments not included in cash equivalents. Investing cash flows typically include the cash flows associated with buying or selling property, plant and equipment, other non-current assets, and other financial assets. Cash spent on purchasing PP&E, or property, plant and equipment, is called capital expenditures, or CapEx.
Importance for Investors
The cash flow statement is useful to investors because, under the notion that cash is king, it allows investors to get an overall sense of the company's cash inflows and outflows and obtain a general understanding of its overall performance.
