Understanding Cash Flow Statements

Introduction to Cash Flow Statements

Cash flow statements, also known as statements of cash flows, are financial statements that show how changes in balance sheet accounts and income affect cash and cash equivalents.

They are divided into three parts: cash flows from operating activities, investing activities, and financing activities.

Cash flow statements provide valuable information to investors, creditors, and analysts as they show the ability of a company to generate cash.Learn more about the importance of cash flow statements.

Cash Flows from Operating Activities

Cash flows from operating activities, also known as cash flows from business activities, report the cash effects of transactions that enter into the determination of net income.

This section includes items such as cash collections from customers, payments to suppliers, and operating expenses.

A positive cash flow from operating activities indicates that a company is generating enough cash from its core business to fund its daily operations.Learn about effective cash flow management strategies

Cash Flows from Investing Activities

Cash flows from investing activities report the cash effects of transactions that relate to the acquisition and disposal of long-term assets.

This section includes items such as purchases of property, plant, and equipment, and sales of investments.

A negative cash flow from investing activities is common for growing companies as they invest in long-term assets for future growth.Understand the different types of financial statements

Cash Flows from Financing Activities

Cash flows from financing activities report the cash effects of transactions that relate to the issuance and repayment of debt and equity instruments.

This section includes items such as the issuance of bonds, payments of dividends, and repurchase of common stock.

A positive cash flow from financing activities indicates that a company is raising cash from external sources, which can be used to fund growth or reduce debt.

Analyzing Cash Flow Statements

Cash flow statements are an important tool for financial analysis as they provide a comprehensive view of a company's cash position.

Analysts use cash flow statements to assess a company's ability to generate cash, its liquidity, and its financial flexibility.

A thorough analysis of cash flow statements, along with other financial statements, can provide valuable insights into a company's financial health and prospects.Understand the different types of financial statements