What is the Statement of Cash Flows?
The statement of cash flows reports how cash entered and left a business during a period, organized into operating, investing, and financing activities. Unlike the income statement, it ignores accruals and shows only actual cash movement.
The statement of cash flows summarizes cash inflows and outflows across operating, investing, and financing activities, showing the net change in a company's cash balance for the period.
- 1↓Operating ActivitiesCash from core business operations: net income adjusted for non-cash items and working capital changes.
- 2↓Investing ActivitiesCash used to buy/sell long-term assets, like equipment or investments.
- 3↓Financing ActivitiesCash from debt, equity issuance, dividends, and share buybacks.
- 4Net Change in CashSum of all three sections — the actual change in the cash balance for the period.
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Step-by-step worked examples
A company has CFO = $50,000, CFI = −$20,000 (equipment purchase), and CFF = −$10,000 (debt repayment). Find the net change in cash.
Net change = 50,000 + (−20,000) + (−10,000) Net change = 20,000 Cash balance increased by $20,000 for the period.
Net income is $40,000. Depreciation was $5,000 (non-cash) and Accounts Receivable increased by $8,000. Find CFO using the indirect method.
Start with net income: 40,000 Add back depreciation (non-cash): +5,000 Subtract the increase in AR (cash not yet collected): −8,000 CFO = 40,000 + 5,000 − 8,000 = 37,000
A company reports CFO = $15,000, CFI = $30,000 (sold an old building), CFF = −$25,000 (paid dividends). What's the net change in cash, and is the company healthy?
Net change = 15,000 + 30,000 − 25,000 = 20,000 Cash rose $20,000, but most of it came from selling an asset (investing), not operations A closer look is needed — relying on asset sales rather than operating cash isn't sustainable long-term.
Flashcards
Quick quiz
Q1.What are the three sections of the statement of cash flows?
Q2.CFO = $30,000, CFI = −$10,000, CFF = $5,000. What's the net change in cash?
Q3.Buying new equipment appears in which section?
Q4.Issuing new shares for cash appears in which section?
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Common mistakes
Confusing net income with net cash flow. — Correct: Net income includes non-cash items (like depreciation) and accruals; cash flow shows only actual cash movement.
Putting equipment purchases under financing activities. — Correct: Buying long-term assets is an investing activity, not financing.
Treating a big cash increase as automatically good news. — Correct: Check the source — cash from selling assets or borrowing isn't as sustainable as cash from operations.
Forgetting to add back depreciation in the indirect method. — Correct: Depreciation reduces net income but isn't a cash outflow, so it must be added back to get CFO.
FAQ
What is the formula for the statement of cash flows?
Net Change in Cash = CFO + CFI + CFF, where CFO, CFI, and CFF are cash flow from operating, investing, and financing activities.
What are examples of items in each section of the cash flow statement?
Operating: net income, depreciation, AR/AP changes. Investing: buying/selling equipment. Financing: issuing debt/equity, paying dividends.
How do you calculate operating cash flow (CFO)?
Using the indirect method: start with net income, add back non-cash expenses like depreciation, and adjust for changes in working capital.
Why is the cash flow statement important?
It shows whether a company generates enough real cash to fund operations, unlike the income statement, which can include non-cash accruals.