A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources.
A cash flow statement also includes all cash outflows that pay for business activities and investments during a given period.
It summarizes the amount of cash and cash equivalents entering and leaving the business.
The cash statement is broken down into three sections namely, cash flow from operating activities, cash flow from investing activities and cash flow from financing activities:
- Cash flow from Operating Activities
- The operating activities include any sources and uses of cash from business activities. In other words, it reflects how much cash is generated from a company’s products or services. Operating activities might include receipts from sale of good or rendering of services, salaries paid to employees, rent payments, etc.
- Cash flow from Investing Activities
- Investing activities include any sources and uses of cash from a company’s investments. Purchases or sales of assets, loans granted or received, or any payments related to mergers and acquisitions are included in this category.
- Cash Flow from Financing Activities
- Financing activities include the sources of cash from investors and banks, as well as the way cash is paid to shareholders. This includes any dividends, payments for stock repurchases, and repayment of debt principal (loans) that are made by the company.
There are two methods of calculating the cash flow, the direct and indirect method:
- The Direct Method
- The direct method adds up all the cash payments and receipts, including cash paid to suppliers, cash receipts from customers, and cash paid out in salaries.
- This method is easier and convenient for small companies.
- The Indirect Method
- With the indirect method, cash flow is calculated by adjusting net income by adding or subtracting differences resulting from non-cash transactions. Non-cash items show up in the changes to a company’s assets and liabilities on the balance sheet from one period to the next.