Cash Flow Statement: Definition, Format and Example

• Operating Cash Flow (OCF): Cash generated or consumed by the core business activities, such as sales of products or services, payment to suppliers, wages and other day-to-day expenses.
• Inflows (Cash Received)
• Cash Receipts from Sales - Cash received from customers for the sale of goods or services.
• Cash Receipts from Accounts Receivable - Collections of money owed by customers (reducing accounts receivable).
• Other Operating Cash Receipts - Any other cash receipts related to the core business operations (e.g., tax refunds, lawsuit settlements).
• Outflows (Cash Paid)
• Cash Payments to Suppliers - Payments made for inventory, raw materials, and other supplies used in production.
• Cash Payments to Employees - Salaries, wages, and other employee benefits paid.
• Cash Payments for Operating Expenses - Payments for rent, utilities, insurance, and other overhead costs.
• Cash Payments for Taxes - Income tax payments and other business-related taxes.
• Cash Payments for Interest - Interest payments on loans or other borrowings.
• Cash Payments to Settle Accounts Payable - Payments to suppliers or creditors for previous purchases on credit.
• Other Operating Cash Payments - Any other payments related to the core business operations (e.g., legal settlements, business licenses).
• Investing Cash Flow (ICF): Cash used for or generated from investments, such as purchasing or selling assets like property, equipment or securities.
• Inflows (Cash Received)
• Sale of Property, Plant and Equipment (PPE) - Cash received from selling physical assets.
• Sale of Intangible Assets - Cash received from selling intangible assets.
• Sale of Investments - Cash received from selling stocks, bonds or other securities.
• Repayment of Loans Made to Others - Cash received from the repayment of loans previously made to other entities or individuals.
• Dividends Received from Investments - Cash received as dividends from investments in other companies (sometimes classified under operating activities depending on the company's policy).
• Outflows (Cash Used)
• Purchase of Property, Plant, and Equipment (PPE) - Cash spent on acquiring physical assets like buildings, machinery, and equipment.
• Purchase of Intangible Assets - Cash spent on acquiring non-physical assets like patents, trademarks, and goodwill.
• Purchase of Investments - Cash used to buy stocks, bonds, or other securities as investments.
• Loans Made to Others - Cash lent to other entities or individuals.
• Purchase of Subsidiaries or Other Businesses - Cash spent on acquiring other companies or business units.
• Financing Cash Flow (FCF): Cash related to borrowing or repaying debts, issuing or buying back shares and paying dividends.
• Inflows (Cash Received)
• Proceeds from Issuance of Equity (Stock Issuance) - Cash received from issuing new shares of stock.
• Proceeds from Issuance of Debt (Loans, Bonds) - Cash received from borrowing money, whether through loans, bonds or other debt instruments.
• Proceeds from Treasury Stock Sales - Cash received from selling treasury stock (previously repurchased shares).
• Outflows (Cash Used)
• Repayment of Debt (Principal Repayments) - Cash used to pay back the principal amount of loans or other debt.
• Payments for Dividends - Cash paid to shareholders as dividends.
• Payments for Share Buybacks (Treasury Stock Purchase) - Cash used to repurchase the company’s own shares from the market.
• Payments for Debt Issuance Costs - Cash spent on fees and expenses related to issuing debt.
• Payments for Equity Issuance Costs - Cash spent on fees and expenses related to issuing equity.

• Assessing Liquidity and Solvency: To determine the company's ability to generate enough cash to meet its short-term obligations (liquidity) and long-term debts (solvency).
• Understanding Cash Generation: Provide insights into how well the company is generating cash from its operating activities.
• Evaluating Cash Management: Analyze how the company is managing its cash in terms of investing and financing activities.
• Analyzing Financial Flexibility: Assess the company’s ability to adapt to unexpected needs or opportunities by looking at its cash reserves and flows.
• Comparing Performance: Provide a basis for comparing the company’s performance across different periods or against other companies.
• Identifying Cash Flow Patterns: Help identify trends or patterns in cash flow over time.
• Supporting Financial Planning: Aid in the development of future financial plans and budgets by providing historical cash flow data.
• Informing Investment and Credit Decisions: Provide essential information to investors, creditors, and other stakeholders about the company’s cash flow status.
• Verifying the Accuracy of Profitability: Cross-check the accuracy of the company’s reported net income by reconciling it with the actual cash flows.
• Enhancing Transparency: Provide a clear and transparent view of where the company’s cash is coming from and how it’s being used.

1. Cash Flow Statement Direct Method
2. Cash Flow Statement Indirect Method

• Cash Receipts: Lists all the cash received from customers, interest, dividends, etc.
• Cash Payments: Lists all cash payments made to suppliers, employees, interest, taxes, etc.
• Clear Picture: Provides a straightforward view of cash inflows and outflows, making it easier to understand the cash position.
• Detail-Oriented: Requires detailed records of cash transactions, which can be more time-consuming to prepare.

• Cash received from customers: $500,000
• Cash paid to suppliers: $300,000
• Cash paid to employees: $100,000
• Cash paid for interest: $20,000
• Cash paid for taxes: $30,000

• Adjustments: Adjusts net income for non-cash items (e.g., depreciation, amortization) and changes in working capital accounts (e.g., accounts receivable, inventory, accounts payable).
• Widely Used: The most commonly used method, as it links the cash flow statement to the income statement and balance sheet.
• Less Detailed: Doesn’t show individual cash transactions but instead focuses on adjustments to reconcile net income to cash flow.

Cash Flow Statement Indirect Method Example

• Starting with Net Income: $40,000
• Add back Depreciation: $10,000
• Increase in Accounts Receivable: ($5,000)
• Decrease in Inventory: $3,000
• Increase in Accounts Payable: $2,000

• Start with Net Income:
• Begin with the net income figure from the income statement. Net income includes all revenues and expenses, some of which may not involve actual cash transactions (e.g., depreciation, amortization).
• Adjust for Non-Cash Items:
• Add back non-cash expenses: These include depreciation, amortization, and impairments because they reduce net income but do not involve actual cash outflows.
• Adjust for non-cash gains and losses: Subtract gains (e.g., on the sale of equipment) and add losses because these are included in net income but are related to investing or financing activities, not operating cash flows.
• Adjust for Changes in Working Capital:
• Accounts Receivable: Subtract an increase (as it represents revenue not collected in cash) and add a decrease (as it represents cash that has been collected).
• Inventory: Subtract an increase (as it represents cash spent but not yet expensed as COGS) and add a decrease (as it represents inventory sold, which affects net income).
• Accounts Payable: Add an increase (as it represents expenses incurred but not yet paid) and subtract a decrease (as it represents payments made).
• Other current liabilities: Similar adjustments as with Accounts Payable.
• Result: Net Cash Provided by Operating Activities:
• After all adjustments, you arrive at the net cash provided by or used in operating activities.
• Example:

• Net Income: $50,000
• Depreciation Expense: $10,000
• Gain on Sale of Equipment: $3,000
• Increase in Accounts Receivable: $5,000
• Decrease in Inventory: $2,000
• Increase in Accounts Payable: $4,000

• Cash Inflows:
• Proceeds from sale of equipment: $15,000
• Proceeds from sale of investments: $25,000
• Cash Outflows:
• Purchase of a building: $(100,000)
• Purchase of marketable securities: $(20,000)

• Issued new shares for $50,000.
• Paid dividends of $10,000.
• Repaid a bank loan of $20,000.
• Financing Activities Section:

• Proceeds from issuing shares: $50,000

• Dividends paid: $(10,000)
• Loan repayment: $(20,000)

• Net Increase (Decrease) in Cash = Net Cash from Operating Activities + Net Cash from Investing Activities + Net Cash from Financing Activities

• Net Increase (Decrease) in Cash = $58,000 (Operating) - $80,000 (Investing) + $20,000 (Financing) = $(2,000)

• Cash and Cash Equivalents at the Beginning of the Period: Say the company started with $10,000 in cash.
• Net Increase (Decrease) in Cash: From the above, $(2,000).
• Cash and Cash Equivalents at the End of the Period:
• Cash at End = Cash at Beginning + Net Increase (Decrease)
• Cash and Cash Equivalents at End of the Period = $10,000 - $2,000 = $8,000

• Cash Flow Statement (Indirect Method)
• Cash Flows from Operating Activities:
• Net Income: $50,000
• Adjustments for non-cash items:
• Depreciation: $10,000
• Gain on Sale of Equipment: $(3,000)
• Changes in working capital:
• Increase in Accounts Receivable: $(5,000)
• Decrease in Inventory: $2,000
• Increase in Accounts Payable: $4,000
• Net Cash Provided by Operating Activities: $58,000
• Cash Flows from Investing Activities:
• Proceeds from sale of equipment: $15,000
• Proceeds from sale of investments: $25,000
• Purchase of a building: $(100,000)
• Purchase of marketable securities: $(20,000)
• Net Cash Used in Investing Activities: $(80,000)
• Cash Flows from Financing Activities:
• Proceeds from issuing shares: $50,000
• Dividends paid: $(10,000)
• Loan repayment: $(20,000)
• Net Cash Provided by Financing Activities: $20,000
• Net Increase (Decrease) in Cash: $(2,000)
• Cash and Cash Equivalents at Beginning: $10,000
• Cash and Cash Equivalents at End: $8,000

• Identify Cash Receipts: Cash Received from Customers: Total cash collected from sales during the period.
• Other Operating Cash Receipts: Cash from other operating activities such as interest or dividends received.
• Identify Cash Payments:
• Cash Paid to Suppliers: Cash payments for goods and services that are part of operating activities.
• Cash Paid to Employees: Wages and salaries paid during the period.
• Cash Paid for Operating Expenses: Cash used for other operating expenses (e.g., rent, utilities).
• Cash Paid for Interest: Cash paid on interest for borrowed funds.
• Cash Paid for Taxes: Cash paid for income taxes during the period.
• Calculate Net Cash Provided by Operating Activities:
• Subtract total cash payments from total cash receipts to determine the net cash flow from operating activities.

• Identify Cash Outflows:
• Purchase of Property, Plant, and Equipment (PPE): Cash spent on acquiring long-term assets.
• Purchase of Investments: Cash used to buy investments.
• Identify Cash Inflows:
• Proceeds from Sale of Equipment: Cash received from selling assets.
• Proceeds from Sale of Investments: Cash received from selling investments.
• Calculate Net Cash Used in Investing Activities:
• Subtract total cash outflows from total cash inflows to determine net cash used in investing activities.

• Identify Cash Inflows:
• Proceeds from Issuance of Stock: Cash received from issuing new shares.
• Proceeds from Issuance of Debt: Cash received from borrowing.
• Identify Cash Outflows:
• Repayment of Debt: Cash used to repay borrowed funds.
• Payment of Dividends: Cash paid to shareholders as dividends.
• Calculate Net Cash Provided by Financing Activities:
• Subtract total cash outflows from total cash inflows to determine net cash provided by financing activities.

• Calculate Net Increase (Decrease):
• Add net cash provided by (or used in) operating, investing, and financing activities.

• Report Beginning Cash Balance:
• This value is carried over from the previous period's ending cash balance.

• Calculate Ending Cash Balance:
• Add the net increase (or subtract the net decrease) to the beginning cash balance to arrive at the ending cash balance.