If you’re studying a business-related course, you will have come across the 3 financial statements. As the fundamental statements that provide a snapshot of any company’s finances, it’s important to be across all of these. Previously, we covered the balance sheet and income statement. This blog is the third instalment in our financial statements series, and covers the cash flow statement. It will also go over some key links between all three financial statements!
The cash flow statement, or statement of cash flows, is a summary of cash inflows and outflows for a company over the reporting period. This is a very important statement because cash is the lifeblood of the business and an indication of a business’ ability to survive. It focuses greatly on liquidity, which we saw is an important indication of financial health in this article.
Let’s move through the key line items in the cash flow statement in chronological order. Note that cash flows are recorded as either “payments to” or “receipts from” the below activities:
Cash flows from operating activities: These come from the revenue and expenses line items in the income statement, as well as represents some of the current assets and liabilities on the balance sheet. For example, this category includes items such as rent expense, wages paid, or revenue earned.
Cash flows from investing activities: These primarily constitute funds deployed to acquire non-current assets. For example, investments in machinery or equipment would count as payments to investing activities.
Cash flows from financing activities: These include receipts gained to finance the business, mostly over the long-term, and costs associated with those. These funds obtained can be reflected in the non-current liabilities and owners’ equity sections of the balance sheet. Often, the total sum of cash flows from investing and operating activities would be negative, and the business would rely on positive receipts from financing activities to deliver cash injections.
Opening cash balance: The amount of cash leftover from last period. This comes from the cash line item from last period’s balance sheet.
Net increase/(decrease) in cash and cash equivalents held: The sum of all cash flows from operating, investing, and financing activities.
Closing cash balance: Opening cash balance plus the net increase/(decrease) in cash and cash equivalents. This term is also reflected in the cash line item in the current assets section of this period’s balance sheet.
Overall, the cash flow statement tells us how a business has generated money during the reporting period and where that cash has gone. By tracking down the sources and uses of cash over time, it helps to measure a firm’s working capital, cash sufficiency, and liquidity.
Disclaimer: The intent of this blog is to provide careers advice, not financial advice. It does not take into account individual circumstances. For financial advice, please see a financial adviser.
