Cash Flow Statement
Definition
A financial statement that summarizes the amount of cash and cash equivalents flowing into and out of a company during a specific period (e.g., a quarter or a year). It provides a dynamic view of a company’s cash movements, showing where cash came from (inflows) and where it was spent (outflows). It is one of the three core financial statements, along with the Balance Sheet and the Income Statement.
The Three Sections of the Cash Flow Statement
The Cash Flow Statement is divided into three main sections:
- Operating Activities: Cash flows from the company’s core business operations.
- Investing Activities: Cash flows from the purchase and sale of long-term assets.
- Financing Activities: Cash flows related to how the company is funded.
Example (Conceptual)
Imagine a company reports a profit of $1 million on its Income Statement. However, its Cash Flow Statement shows:
- Net Cash Flow from Operating Activities: -$500,000 (negative!)
- Net Cash Flow from Investing Activities: -$200,000
- Net Cash Flow from Financing Activities: +$800,000
This company is profitable on paper, but it’s burning through cash in its operations and investments. This is a very different picture than if the operating cash flow.
Simple Example Cash Flow Statement Table:
Let’s look at a simplified example for “Example Company, Inc.” for the year ended December 31, 2024:
| Cash Flow Category | Explanation | Amount (AUD) |
|---|---|---|
| 1. Cash Flow from Operating Activities | Money from the regular business: | |
| Cash Receipts from Customers | Money collected from sales. | + $600,000 |
| Cash Paid to Suppliers and Employees | Money spent on supplies, salaries, rent, etc. | - $450,000 |
| Net Cash from Operating Activities | Total money in minus total money out from operations. | $150,000 |
| 2. Cash Flow from Investing Activities | Money from buying/selling long-term assets: | |
| Purchase of Equipment | Money spent on new equipment. | - $80,000 |
| Sale of Land | Money received from selling a piece of land. | + $30,000 |
| Net Cash from Investing Activities | Total money in minus total money out from these activities. | ($50,000) |
| 3. Cash Flow from Financing Activities | Money related to borrowing, repaying loans, or owners (stock): | |
| Proceeds from Issuance of Stock | Money raised by selling new shares of the company. | + $100,000 |
| Payment of Dividends | Money paid out to shareholders as a return on their investment. | - $20,000 |
| Net Cash from Financing Activities | Total money in minus total money out from financing. | $80,000 |
| Net Increase/Decrease in Cash | Add up all the “Net Cash” lines from the three sections above. | $180,000 |
| Cash at Beginning of Year | Cash the company had in the bank at the start of the year. | $50,000 |
| Cash at End of Year | Cash at Beginning + Net Increase/Decrease = Cash at the end of the year. | $230,000 |
Plain English Explanation of the Example:
- Operating Activities: Example Company, Inc. generated $150,000 in cash from its core business (selling goods or services and paying its operating expenses).
- Investing Activities: They spent a net $50,000 on investing activities (they spent more on buying equipment than they made from selling land).
- Financing Activities: They had a net inflow of $80,000 from financing activities (they raised money by selling stock, but also paid out some dividends).
- Overall: The company’s cash increased by $180,000 during the year. They started with $50,000 and ended with $230,000.
Key Takeaways
While the Income Statement can sometimes be manipulated through accounting choices, the Cash Flow Statement is much harder to ‘fake.’ It shows the actual movement of cash, making it a more reliable indicator of a company’s true financial health.