Definition
A Statement of Cash Flow, in finance, is a financial document that provides a detailed summary of a company’s cash inflows and outflows during a specific period. It is divided into three parts: cash flows from operating activities, investing activities, and financing activities. It gives stakeholders an understanding of how a company is generating its cash and how that cash is being allocated.
Key Takeaways
- The Statement of Cash Flow is an essential financial report that provides detailed information about the company’s cash inflow and outflow during a certain period, giving insights into its cash-generating abilities.
- This statement is divided into three main sections: operating activities, investing activities, and financing activities. These sections provide a comprehensive look at where the company’s cash comes from, how it’s spent, and the net change in cash resulting from these activities.
- The Statement of Cash Flow can reveal a company’s liquidity position, be used to determine whether a company has the cash to pay its expenses, and can be a useful tool in predicting future cash flow patterns and business performance.
Importance
The Statement of Cash Flow is an integral financial document as it provides detailed insights about a company’s cash inflows and outflows over a specific period.
This report essentially narrates the story of how a company is generating and using its cash, segregating the cash flows into operating, investing, and financing activities.
This information is invaluable for investors, creditors and other stakeholders as it helps them evaluate the company’s liquidity, solvency, and overall financial health.
Unlike the income statement that follows the accrual accounting principle, the cash flow statement offers a realistic view of the actual cash on hand, hence it is a critical tool in decision making.
Explanation
The statement of cash flow is an integral part of a company’s financial reports. Its main purpose is to provide detailed insights into the company’s cash inflow and outflow over a certain period of time, enabling the company to evaluate and plan its financial strategy with more precision.
This report is a reliable tool for understanding the company’s liquidity and solvency, and reveals the ability of the company to generate cash to meet its debt obligations, and fund its operating expenses. The Statement of Cash Flow is significant in its use of providing investors and creditors with a clear picture of the company’s cash-generating capabilities.
More specifically, an investor evaluates a company’s cash flow statement to determine whether a company has enough cash to pay its bills and dividends, or needs to finance new projects. An assessment of the company’s cash flow statement allows stakeholders to understand the fundamental parameters of the company’s financial health, formulating an objective analysis of its financial performance, and assisting in decision-making processes.
Examples of Statement of Cash Flow
Apple Inc.: Apple Inc., one of the world’s biggest tech companies, shares its statement of cash flow publicly as part of its financial reports. The statement demonstrates to its investors the amount of cash generated and expended over a given period. It is divided into the areas of operating, investing, and financing activities. In Q1 of 2021 for example, Apple posted a net cash from operating activities of $44 billion, showcasing the financial health of the company.
Starbucks Corporation: Starbucks Corporation is another real-world example of a company that utilizes a statement of cash flow. This document is important for Starbucks to demonstrate to investors it is generating enough cash to pay its debts and fund its operating expenses. In 2020, Starbucks reported net cash provided by operating activities of $9 billion, and net cash used in investing activities of $
5 billion, which is helpful for stakeholders to analyze its performance and ascertain its management efficiency.Amazon Inc.: As one of the most valuable companies globally, Amazon Inc. also uses a statement of cash flow to communicate the sources and uses of its cash. In 2020, Amazon posted net cash provided by operating activities of $
1 billion and $1 billion used in investing activities. These figures help shareholders, potential investors, and credit lenders to assess Amazon’s short-term viability, ability to pay back debt, and capacity to fund future growth.
Statement of Cash Flow FAQs
What is a Statement of Cash Flow?
The Statement of Cash Flow is a financial statement that provides a detailed breakdown of a company’s cash inflow and outflow over a certain period. This statement categorizes the cash flows into different sections like operating, investing, and financing activities.
Why is the Statement of Cash Flow important?
The Statement of Cash Flow is important because it provides investors and shareholders with an understanding of how a company is managing its cash resources, how it generates cash to pay off its debt and fund its operating expenses, and where its cash is coming from.
What is included in a Statement of Cash Flow?
A Statement of Cash Flow includes cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. It also includes the beginning and ending balance of cash and cash equivalents.
How is the Statement of Cash Flow different from an Income Statement?
The Statement of Cash Flow and an Income Statement differ in several ways. An Income Statement shows the revenues, costs, and expenses over a period which provides the net income of a business. Meanwhile, the Statement of Cash Flow provides information about cash receipts and payments of a company.
How do you read a Statement of Cash Flow?
To read a Statement of Cash Flow, start by looking at the cash flow from operating activities section to understand how the business operations are generating or using cash. Then, review the cash flow from investing activities to see how investments are impacting the company’s cash flow. Lastly, examine the cash flow from financing activities to understand if the company is raising or repaying capital.
Related Entrepreneurship Terms
- Operating Activities
- Investing Activities
- Financing Activities
- Net Cash Flow
- Cash Flow Forecast
Sources for More Information
Sure, here are four reliable sources about the finance term: Statement of Cash Flow:
- Investopedia: A comprehensive resource for understanding investing, finance, and market theory.
- Khan Academy: A robust learning platform offering lessons in finance and capital markets.
- AccountingCoach: A site offering clear, concise explanations of accounting and finance concepts.
- Corporate Finance Institute: A professional development company providing online courses for finance professionals.
