The statement of cash flow is a financial statement that provides an overview of how cash moves in and out of a business during a specific period. It categorizes these cash flows into three main sections: operating activities, investing activities, and financing activities.
- Operating Activities:
- Cash flows from day-to-day business operations, such as sales and expenses.
- Includes receipts from customers, payments to suppliers, employee wages, and other operational transactions.
- Investing Activities:
- Involves cash transactions for the purchase and sale of long-term assets.
- Includes investments in property, equipment, stocks, or bonds, and the sale of such assets.
- Financing Activities:
- Relates to transactions with the business’s owners and creditors.
- Involves activities such as issuing or repurchasing stocks, paying dividends, and borrowing or repaying loans.
Structure of a Statement of Cash Flow:
- Operating Activities:
- Net Income (from the income statement)
- Adjustments for non-cash items (depreciation, changes in working capital)
- Operating cash flow
- Investing Activities:
- Cash flows from the purchase or sale of long-term assets
- Financing Activities:
- Cash flows from issuing or repurchasing stocks
- Cash flows from borrowing or repaying loans
- Payment of dividends
Example:
Operating Activities
- Net Income: $50,000
- Depreciation: $10,000
- Changes in Working Capital: +$5,000
- Operating Cash Flow: $65,000
Investing Activities
- Purchase of Equipment: -$20,000
- Sale of Stocks: +$15,000
- Net Investing Cash Flow: -$5,000
Financing Activities
- Issuance of Bonds: +$30,000
- Repurchase of Stocks: -$10,000
- Payment of Dividends: -$15,000
- Net Financing Cash Flow: +$5,000
In this example, the statement of cash flow shows that the business generated positive cash flow from its operating activities but had negative cash flow from investing activities due to the purchase of equipment. The financing activities section indicates a net positive cash flow, showing how the business financed its operations during the period.