The cash flow statement definition is a financial statement that shows a company’s cash inflows and cash outflows over a period of time. The cash flow statement is one of the most important financial statements of a company. The balance sheet includes an asset account labeled “cash.” The statement of cash flows shows how the company’s operating, investing, and financing activities affected the cash account during the fiscal period. In conclusion, use the statement of cash flows to analyze the financial health of a company.
Cash flow statements divide a company’s activities into three categories, including the following:
Operating activities refer to the company’s core business operations. Whereas, investing activities refer to changes in long-term asset and investment accounts. Financing activities refer to changes in debt and equity accounts. Furthermore, the statement details the cash inflows and outflows for the accounts in each category over the course of the fiscal period.
The bottom line of the cash flow statement, which accounts for the net cash inflows and outflows of all accounts during the fiscal period, must equal the balance of the cash account on the balance sheet.
[box]If you’re struggling to identify your company’s economics, then download the free Know Your Economics Worksheet. [/box]
There are two ways to prepare the operating activities section of a cash flow statement, including the following:
Apply these methods only to operating activities. Always prepare investing activities and financing activities the same way. Therefore, preparing the operating activities section of the cash flow statement either way yields the same results. Furthermore, the indirect method is required by industry regulations, so companies always report cash flows using the indirect method. However, if they so choose, they can also report cash flows using the direct method.
The direct method shows cash inflows and cash outflows for each of the operating activities. The indirect method, on the other hand, makes a series of adjustments to the company’s net income in order to account for the affects of noncash transactions recorded using accrual accounting. Both methods give the same result.
Want to check if your unit economics are sound? Download your free guide here.
[box]Strategic CFO Lab Member Extra
Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]
A cashflow statement template can be found here:S.C.O.R.E. template gallery