In this article
- What is a Cash Flow Statement?
- Cash Flow Statement: A Real Example
- The Three Cash Flow Statement Sections—Cash Flow Classifications
- 1. Cash Flow from Operating Activities
- 2. Cash Flow From Investing Activities
- 3. Cash Flow from Financing Activities
- Cash Flow Statement: Direct Vs. Indirect Method
- Why Is Cash Flow Statement Important?
What is a Cash Flow Statement?
The cash flow statement, or statement of cash flows, is one of the main financial statements of a business that shows its cash expenses and gains over a specific fiscal period. Public companies operating in the United States are required by law to provide their cash flow statement at the end of every quarter and fiscal year.
Cash Flow Statement: A Real Example
Now that you know what a cash flow statement is, let's take a look at a real example of a cash flow statement. Here's an example of Apple’s cash flow statement, or statement of cash flows, for the years 2018–2020.
Source: Apple's 10K, Oct 30, 2020
The Three Cash Flow Statement Sections—Cash Flow Classifications
1. Cash Flow from Operating Activities
As depicted from Apple's cash flow statement below, cash flow from operating activities is the first section of the statement. Operating activities and cash from operations are those associated with the production and sales of the company's goods and services.
Source: Apple's 10K, Oct 30, 2020
2. Cash Flow From Investing Activities
The second section of the cash flow statements consists of cash flow from investing activities, which are those related to the acquisition or disposal of long-term assets and other securities.
As depicted in Apple's cash flow statement below, examples of cash from investing activities include payments made for the acquisition of property, plant, and equipment (PP&E), proceeds from sales of marketable securities, and other financial securities.
Source: Apple's 10K, Oct 30, 2020
3. Cash Flow from Financing Activities
Cash flow from financing activities is the last section of the statement. Financing activities consist of cash flows impacting the company's equity or debt structure, such as the issuance of common stock or debt. As shown in Apple's statement below, shares buybacks and dividend payments are also included in cash flow from financing activities.
Source: Apple's 10K, Oct 30, 2020
Cash Flow Statement: Direct Vs. Indirect Method
Companies can choose to produce the cash flow statement using both the direct or the indirect method. The difference concerns the presentation of the operating activities section. The financing and investing sections are identical.
Under the direct method, cash flows from operating activities are presented as a plain list of cash flows. In contrast, the indirect method begins with net income and adjusts the result by adding back non-cash expenses and subtracting non-cash gains. Despite the different types of calculation, cash flows from operations will be the same with both methods.
Why Is Cash Flow Statement Important?
One of the most important points that investors should always keep in mind is that not all earnings are created equal. As discussed in this lesson about the Sloan Ratio, The most important accounting financial boards require companies to report their revenues and expenses based on accrual accounting.
Following the accrual accounting method, companies record earnings and costs when transactions occur and not when they receive or deliver the cash. Thus, a firm's net income includes many accruals, which are non-cash earnings.
As you can guess, if the company does not receive any cash, it will not have the money to invest and grow. The cash flow statement is so important because it allows investors to analyze the true profitability of a company.
