What is Cash Flow Statement?
A CFS (cash flow statement) is a crucial financial document that details the cash generated and utilized by a company within a specific period. By studying the cash flow statement, one can determine whether the company has enough cash inflow to cover its debts, sustain operations, and return capital to stockholders through dividends or stock buybacks.
The CFS connects the income statement and balance sheet by illustrating how cash moves in and out of the business through three primary channels: operating, investing, and financing activities. It calculates the net cash flow by identifying the sources of changes between the beginning and ending balances.
The cash flow statement adheres to the cash accounting method, meaning that transactions are recorded in the financial statement when cash actually flows in or out of the business, reflecting real payments received or made.
How Cash Flow Statement is Used
The cash flow statement provides a clear snapshot of a company’s operational efficiency, the sources of its funds, and how those funds are allocated. Often referred to as the statement of cash flows, the CFS is a critical tool for creditors, offering insight into the company’s liquidity—how much cash is available to cover operating expenses and settle debts. For investors, the CFS is equally vital, as it indicates the financial stability of the company, enabling them to make more informed decisions about their investments.
Structure of Cash Flow Statement
The Cash Flow Statement is classified into three primary sections: cash flows from operating activities, investing activities, and financing activities.
Collectively, these sections provide investors and analysts with a comprehensive understanding of a company's overall value. Let's explore each section in more detail below.