Statement of Cash Flows Overview

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Statement of Cash Flows Overview

The statement of cash flows contains information about the flows of cash into and out of a company; in particular, it shows the extent of those activities that generate and use cash. This statement comprises part of the financial statements, though its importance has historically been considered less than the income statement and balance sheet.

The statement of cash flows is quite useful for revealing the existence of cash flows that are not readily apparent from the results listed in the income statement. For example, expenditures may have been made for items classified as assets, so these expenditures do not appear in the income statement, but will appear in the statement of cash flows. Because of the disparity in results, it is entirely reasonable to review the income statement and statement of cash flows together, to gain a proper perspective on any differences between reported financial results and the related cash flows.

The primary activities listed in the statement of cash flows are:

Operating activities are an entity’s primary revenue-producing activities. Examples of operating activities are cash receipts from the sale of goods, as well as from royalties and commissions, amounts received or paid to settle lawsuits, fines, payments to employees and suppliers, cash payments to lenders for interest, contributions to charity, and the settlement of asset retirement obligations.
Investing activities involve the acquisition and disposal of long-term assets. Examples of investing activities are cash receipts from the sale of property, the sale of debt or equity instruments of other entities, and repayment of loans made to other entities. Examples of cash payments that are investment activities include the acquisition of property, plant, and equipment, and purchases of the debt or equity of other entities.
Financing activities are those activities resulting in alterations to the amount of contributed equity and the entity’s borrowings. Examples of financing activities include cash receipts from the sale of the entity’s own equity instruments or from issuing debt, proceeds received from derivative instruments, as well as cash payments to buy back shares, pay dividends, and to pay off outstanding debt.

The statement of cash flows also incorporates the concept of cash and cash equivalents. A cash equivalent is a short-term, very liquid investment that is easily convertible into a known amount of cash, and which is so near its maturity that it presents an insignificant risk of changes in value because of changes in interest rates.

You can use the direct method or the indirect method to present the statement of cash flows. The direct method presents the specific cash flows associated with items that affect cash flow. Items typically affecting cash flow include:

Cash collected from customers
Interest and dividends received
Cash paid to employees
Cash paid to suppliers
Interest paid
Income taxes paid

Under the indirect method, the presentation begins with net income or loss, with subsequent additions to or deductions from that amount for non-cash revenue and expense items, resulting in net cash provided by operating activities. For an example of the direct method, click here. For an example of the indirect method, click here.

Similar Terms

The statement of cash flows is also known as the cash flow statement.