A cash flow statement is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company. It is prepared using the indirect method, which starts with net income and adds or subtracts changes in working capital accounts to arrive at cash flow from operating activities. Cash flow from investing and financing activities is then added to arrive at the net change in cash.
Cash flow statements are important because they provide information about a company’s liquidity and financial health. They can be used to assess a company’s ability to meet its short-term obligations, such as paying its bills and employees, as well as its ability to invest in new projects and grow its business.
Cash Flow from Operating Activities
Cash flow from operating activities is the amount of cash that a company generates from its core business operations. It is calculated by adding or subtracting changes in working capital accounts to net income. Working capital accounts include accounts receivable, inventory, and accounts payable.
A positive cash flow from operating activities indicates that a company is generating enough cash from its operations to meet its short-term obligations and invest in new projects. A negative cash flow from operating activities indicates that a company is not generating enough cash from its operations to meet its short-term obligations and may need to borrow money or sell assets to meet its obligations.
Cash Flow from Investing Activities
Cash flow from investing activities is the amount of cash that a company uses to purchase or sell long-term assets, such as property, plant, and equipment. It is calculated by adding or subtracting changes in long-term asset accounts to net income.
A positive cash flow from investing activities indicates that a company is investing in new projects or expanding its operations. A negative cash flow from investing activities indicates that a company is selling long-term assets or reducing its investment in new projects.
Cash Flow from Financing Activities
Cash flow from financing activities is the amount of cash that a company raises from investors or uses to pay back debt. It is calculated by adding or subtracting changes in debt and equity accounts to net income.
A positive cash flow from financing activities indicates that a company is raising money from investors or borrowing money to finance its operations or new projects. A negative cash flow from financing activities indicates that a company is paying back debt or reducing its debt levels.
Cash flow statements are an important tool for understanding a company’s financial health and performance. They can be used to assess a company’s ability to meet its short-term obligations, invest in new projects, and grow its business.
A basic cash flow statement template can be used to create a cash flow statement for a company. The template includes all of the necessary information to calculate cash flow from operating, investing, and financing activities.
