Cash Flow And Valuation · Beginner · 8 minute read · No ads
Cash Flow Statement
Also called statement of cash flows, cash flows statement
A cash flow statement shows where cash came from and where it went during a period. It separates operating, investing and financing activities. If those sections report +$120 million, −$45 million and −$25 million, the net increase in cash is $50 million.
Key takeaways
- The cash flow statement reconciles opening cash with closing cash for a reporting period.
- Operating activities show cash from core business operations.
- Investing activities cover long lived assets and investments, while financing activities cover funding from owners and creditors.
- Read the statement with the income statement, balance sheet and notes because profit and cash answer different questions.
What is a cash flow statement?
A cash flow statement explains how cash moved into and out of a business during a reporting period. It groups cash flows into operating, investing and financing activities, then reconciles the opening cash balance with the closing balance.
The statement complements the income statement and balance sheet. Profit uses accrual accounting, while the cash flow statement shows the timing and classification of cash receipts and payments.
How Cash Flow Statement works
| Step | What happens |
|---|---|
| 01 · Start with operating cash | Compare operating cash flow with net income and review working capital changes. |
| 02 · Inspect investing cash | Separate capital expenditure, acquisitions, investments and asset sales. |
| 03 · Inspect financing cash | Identify borrowing, repayments, share transactions and dividends. |
| 04 · Reconcile cash | Confirm the sections explain the change from beginning to ending cash. |
The formula
Net change in cash = Operating cash flow + Investing cash flow + Financing cash flow ± Exchange rate effects
Operating cash flow = cash generated or used by core operations Investing cash flow = cash related to long lived assets, investments and similar activities Financing cash flow = cash from or paid to owners and creditors Exchange rate effects = translation effect on cash held in foreign currencies where applicable
A worked cash flow statement example
Suppose a company reports +$120 million of operating cash flow, −$45 million of investing cash flow and −$25 million of financing cash flow. The net change in cash is +$50 million.
If cash began at $90 million, it would end at $140 million before any separate effect from exchange rates or restricted cash presentation. The positive change does not prove the business is healthy by itself: the source of the cash matters.
Why it matters
The cash flow statement helps investors test earnings quality, understand investment needs and see how a company funds itself. It can reveal growing receivables, heavy asset spending, new borrowing, debt repayment, dividends and share repurchases.
Use the Stock Screener to identify companies for deeper research, then read the actual filing. Use the DCF Valuation Tool to explore how future cash flow assumptions influence an estimated value.
From operating cash to free cash flow
See how capital spending is subtracted from operating cash in a common free cash flow measure.
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Operating activities
Operating activities show cash related to the main business. Under the indirect method, the section starts with net income and adjusts noncash items and operating assets and liabilities. This reconciliation explains why reported profit and operating cash differ.
Investing activities
Investing activities generally include purchases and sales of property, plant and equipment, investment securities and business units. A negative subtotal can reflect productive investment, so inspect the components instead of judging the sign alone.
Financing activities
Financing activities show cash raised from or returned to owners and creditors. Common items include borrowing, debt repayment, share issuance, share repurchases and dividends. A company can increase cash by borrowing even when operations are weak.
Direct and indirect presentation
The direct method presents major classes of operating cash receipts and payments. The indirect method starts with net income and reconciles it to operating cash. Either approach still reports investing and financing activities and reconciles cash for the period.
How the statement ties together
Beginning cash plus the net change in cash, adjusted for any exchange rate effect and presentation of restricted cash where relevant, should reconcile to ending cash. Compare that amount with the balance sheet and read the notes for noncash investing and financing transactions.
Comparison
| Statement | Main focus | Key question |
|---|---|---|
| Income statement | Revenue, expenses and profit over a period | Was the business profitable under accrual accounting? |
| Balance sheet | Assets, liabilities and equity at a point in time | What does the business own and owe? |
| Cash flow statement | Cash receipts and payments over a period | Where did cash come from and where did it go? |
Check yourself
Operating cash flow is +$120 million, investing cash flow is −$45 million and financing cash flow is −$25 million. What is the net change in cash?
$120 million − $45 million − $25 million equals a $50 million increase in cash.
Show the answer
+$50 million
Things people get wrong
Mistake 01 Treating positive total cash flow as proof of strength
Borrowing or asset sales can increase cash even when operations are weak.
Mistake 02 Ignoring working capital timing
Receivables, inventory and payables can shift cash between periods.
Mistake 03 Confusing noncash items with cash movements
Depreciation affects profit but does not itself use current period cash.
Questions people ask about Cash Flow Statement
What are the three sections of a cash flow statement?
Operating, investing and financing activities are the three main sections.
How is a cash flow statement different from an income statement?
The income statement reports accrual based profit, while the cash flow statement reports cash receipts and payments.
What does positive operating cash flow mean?
It means operating activities provided net cash during the period, but sustainability and working capital timing still matter.
Why can investing cash flow be negative?
A company may be buying property, equipment, investments or businesses. Negative investing cash flow can reflect growth or maintenance investment.
Can financing cash flow be positive?
Yes. Borrowing or issuing shares can provide cash, while repayments, repurchases and dividends use cash.
What is the indirect method?
It starts with net income and adjusts noncash items and changes in operating assets and liabilities.
Should ending cash match the balance sheet?
The reconciliation should tie to reported cash and cash equivalents, subject to the company's presentation of restricted cash and exchange rate effects.
The bottom line
The cash flow statement explains the movement in cash across operations, investment and financing. Read each section, reconcile opening and closing cash and trace unusual items to the notes before deciding whether the period's cash generation is durable.
Sources
- US SEC, Beginner's Guide to Financial Statements
- US SEC, What is a statement of cash flows?
- US SEC, The Statement of Cash Flows: Improving the Quality of Cash Flow Information Provided to Investors
- US SEC, Cash Flow Statement Data Element Presentation
How we produced the figuresThe example adds +$120 million of operating cash flow, −$45 million of investing cash flow and −$25 million of financing cash flow to produce a +$50 million net change. Exchange rate effects are excluded from the illustration.
Turn cash flow into a valuation input
Explore how future cash flow and discount rate assumptions change an estimated value.
About this page. Written by Associate Professor Charles Lo, CPA, PhD and edited by Felix La Spina. Checked against reliable sources before publication. No ads and no paywall. Editorial standards · How we fact check · Corrections log · Report an error
Educational information only. Nothing on this page is personal financial, tax or legal advice. Investing involves risk, including the possible loss of principal.
