What is Cash Flow Statement?

527 reads · Last updated: December 5, 2024

A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows that a company receives from its ongoing operations and external investment sources. It also includes all cash outflows that pay for business activities and investments during a given period. A company’s financial statements offer investors and analysts a portrait of all the transactions that go through the business, where every transaction contributes to its success. The cash flow statement is believed to be the most intuitive of all the financial statements because it follows the cash made by the business in three main ways: through operations, investment, and financing. The sum of these three segments is called net cash flow.These three different sections of the cash flow statement can help investors determine the value of a company’s stock or the company as a whole.

Definition

A cash flow statement is a financial report that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources. It also includes all cash outflows used for business activities and investments. The cash flow statement is considered the most intuitive of all financial statements because it tracks the cash generated by a company through three main activities: operating, investing, and financing.

Origin

The concept of the cash flow statement originated in the early 20th century as businesses grew larger and financial management became more complex. Companies needed a more intuitive way to display their cash flow situation. In 1987, the Financial Accounting Standards Board (FASB) in the United States officially required all companies to provide a cash flow statement to better reflect their financial health.

Categories and Features

The cash flow statement is divided into three main categories: operating cash flow, investing cash flow, and financing cash flow. Operating cash flow reflects the cash inflows and outflows from a company's daily business operations; investing cash flow involves the company's investments in long-term assets; financing cash flow shows how a company raises funds through borrowing or issuing stock. Each category helps analyze different financial aspects of a company.

Case Studies

For example, Apple's cash flow statement shows strong operating cash flow, primarily from its product sales. On the other hand, Tesla's cash flow statement in its early stages showed significant investing cash outflows as the company invested heavily in expanding production capacity and research and development.

Common Issues

Investors often misunderstand that net cash flow in the cash flow statement is the same as net income in the income statement. In reality, net cash flow reflects actual cash movement, while net income is calculated based on accounting principles. Additionally, cash flow statements may vary due to different accounting policies, so investors need to analyze them carefully.

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