What is a Cash Flow Statement?

A Cash Flow Statement is a financial statement that shows the amount of cash and cash equivalents that flow into and out of a company during a specific period of time. It provides information about a company’s operating, investing, and financing activities, and is an important tool for assessing a company’s financial health.

The cash flow statement is divided into three sections: operating activities, investing activities, and financing activities. Each section provides information about the sources and uses of cash during the period covered by the statement.

How to read and use a Cash Flow Statement?

To read and use a cash flow statement, it is important to understand the following:

• Operating activities: The operating activities section shows the cash flows generated from a company’s primary business operations. This includes cash received from customers, payments to suppliers, salaries and wages paid, and other operating expenses. A positive cash flow from operating activities indicates that the company is generating cash from its core business operations, while a negative cash flow may indicate that the company is struggling to generate enough cash to support its operations.
• Investing activities: The investing activities section shows the cash flows related to the purchase and sale of long-term assets, such as property, plant, and equipment, and investments in other companies. A positive cash flow from investing activities may indicate that the company is investing in growth opportunities, while a negative cash flow may indicate that the company is divesting or disposing of assets.
• Financing activities: The financing activities section shows the cash flows related to the issuance and repayment of debt, and the issuance and repurchase of stock. A positive cash flow from financing activities may indicate that the company is able to raise funds to support its operations, while a negative cash flow may indicate that the company is struggling to obtain financing.
• Free cash flow: Free cash flow is an important metric that can be calculated using the information provided in the cash flow statement. It is calculated by subtracting capital expenditures from cash flow from operating activities. Free cash flow is a measure of the cash that is available to the company for discretionary purposes, such as paying dividends or repurchasing stock.

In summary, the cash flow statement provides valuable information about a company’s sources and uses of cash, and can be used to evaluate the company’s ability to generate cash from its operations, invest in growth opportunities, and obtain financing. By understanding the information presented on the cash flow statement, investors and other stakeholders can gain a better understanding of the company’s financial health and make more informed decisions about their investments.