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Cash Flow Statement

Three Sections of Cash Flow

Operating Activities (CFO)

Cash from core business: net income + D&A + working capital changes.

Investing Activities (CFI)

CapEx, acquisitions, asset sales, securities purchases.

Financing Activities (CFF)

Debt issuance/repayment, equity raises, dividends, buybacks.

Net Change in Cash

Sum of the three sections + beginning cash = ending cash.

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Gain a comprehensive understanding of the key aspects of a Cash Flow Statement, its three critical sections—Operating Activities, Investing Activities, and Financing Activities, and how it provides vital information about a company's cash inflows and outflows.

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:

  1. Operating Activities
  2. Investing Activities
  3. 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 Transcript5 sections

1Full 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.

2Three 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.