What Is a Cash Flow Statement?
The cash flow statement shows where a company's cash came from and where it went during a quarter or year. It exists because accrual accounting lets reported profits diverge from actual cash: a company can book revenue it has not collected and expenses it has not paid.
The statement is divided into three sections. Cash flow from operations covers the core business, cash flow from investing covers asset purchases and sales, and cash flow from financing covers debt, equity, and dividends.
How the Three Sections Work
The operating section typically starts with net income, adds back non-cash charges like depreciation and amortization, and adjusts for changes in working capital such as receivables, inventory, and payables. This converts accounting profit into cash generated by the business.
The investing section captures capital expenditures, acquisitions, and purchases or sales of investments, and is usually negative for a growing company. The financing section shows debt raised or repaid, shares issued or bought back, and dividends paid, revealing how the company funds itself.
Example
Suppose a company reports $200 of net income, $50 of depreciation, and a $30 increase in accounts receivable. Operating cash flow is $200 + $50 - $30 = $220. If it then spends $100 on new equipment and repays $40 of debt, the net change in cash for the period is $220 - $100 - $40 = $80.
Why It Matters
Cash pays the bills, not accounting profit, so the cash flow statement is often the first place sophisticated investors look for signs of trouble or hidden strength. Free cash flow, the key input to DCF valuation, is built from operating cash flow minus capital expenditures.
It is also central to the classic interview question about walking through the three statements, since a change on the income statement must flow through the cash flow statement before it lands on the balance sheet.
