The Statement of Cash Flows

The statement of cash flows is one of the three basic financial statements.

The statement of cash flows reports the source of cash coming into the business and the use of cash flowing out of the business for a period of time. The report is relatively simple to understand, but it can be challenging to prepare correctly.

The cash flow starts with net income or net loss reported on an accrual basis from the profit and loss statement. This simply means that non-cash expenses and income are embedded in the net income/loss number. I know this may sound confusing, but hang with me. All you need to keep straight, for now, is that the net income/loss number does not represent cash. We’ll have to do a little work to get to the source and use of cash, which is categorized into three areas:

1. Cash flow from operating activities
2. Cash flow from investing activities
3. Cash flow from financing activities

Cash flow from operating activities

This is cash generated and used by your core business. If you’re a candlestick maker, then it is cash received from candle sales and cash used to generate those sales. It’s a little more complicated, but for now, it’s good enough to know just that.

Cash flow from investing activities

This is cash received from or used by investing activities.

Let’s say cash was paid for a new candle-making machine and received for selling an older model of the same machine. The cash spent on the new machine would be considered a use of cash for investing in machinery, and the cash receipt for the sale of the old machine would be a source of cash inflow from investing activities.

Cash flow from financing activities

This is cash received from or used by financing activities. If you borrow money from a bank, the cash the bank gives you would be considered a cash inflow from financing activities. When you pay the monthly loan, there is a cash outflow from financing activities.

If you issued company stock, the cash received from the issuance of stock would be reported here. Like cash flow from investing activities, it can get complicated.

Net Cash

When you add up the cash balance from the three areas, you’ll get a net cash activity added to the beginning cash balance to arrive at the ending cash balance reported on the balance sheet. Note that in the three areas above, you can have a net cash inflow or a net cash outflow.

Below, I’ve included an example from Apple Inc. to show you that a presentation can be relatively simple, even though the company has a $3.5 trillion market capitalization.

Note a few things:

• This cash flow statement is for a period of time. In this case, the nine months ended June 29, 2024, and July 1, 2023.
• The net cash activity for each area can be positive (operating and investing) or negative (financing).

That’s the basic layout of the statement of cash flows. As you can see, it’s very useful to know how cash is being used and the sources of cash coming into the business.