Cash Flow Statement

The cash flow statement is one of the three major statements released by most public companies (along with the balance sheet and income statement).   While the statement of cash flows is often considered the 3rd statement by accountants, the financial analyst often considers it the most important, since the value of the firm is ultimately determined by its ability to generate cash flows (see business valuation discussion)

In financial accounting, a cash flow statement is a financial statement that shows incoming and outgoing money during a particular period (often monthly or quarterly). The statement shows how changes in balance sheet and income accounts affected cash and cash equivalents, and breaks the analysis down according to operating, investing, and financing activities. As an analytical tool the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills.

Be careful

The statement of cash flows, however, is still an accounting statement, and is therefore not entirely accurate of the true cash flows of the firm (upon which NPV valuation should be based).  In order to really get to the real cash flows, you need to understand how the statement of cash flows is generated, and what biases it has, since it is based on (created from) the balance sheet and income statement (which are flawed due to accounting ability to manipulate the numbers under GAAP rules). 

Warning:  doint confuse real cash flows with the statement of cash flows published by accountants

Parts of the Statement of Cash Flows

Operating activities

Operating activities include the production, sales and delivery of the company's product as well as collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising and shipping the product.

Items which are added back to the net income figure (which is found on the Income Statement) to arrive at cash flows from operations generally include:

Depreciation

Deferred tax

Amortization

Accounts payable

Investing activities

Investing activities focus on the purchase of the long-term assets a company needs in order to make and sell its products, and the selling of any long-term assets that are no longer needed by the company.

Items under Investing Activities include:

Capital expenditures, which include purchases (and sales) of property, plant and equipment

Investments

Financing activities

Financing activities include the influx of cash from investors such as banks and shareholders, as well as the outflow of cash to investors as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities section of the cash flow statement.

Items under the Financing activities section include:

Dividends paid

Sale or repurchase of the company's stock

Net borrowings

Methods to prepare statement of cash flows

Direct method

The direct method for creating a cash flow statement includes major classes of gross cash receipts and payments. This method starts with revenues and expenses, while also including Current Assets as well as Current Liabilities.

Indirect method

The indirect method uses net income as a starting point, then makes adjustments for all transactions for non-cash items.