What is a statement of cash flows?
A statement of cash flows, or cash flow statement, is a financial statement that summarizes the amount of cash or cash equivalents entering or leaving a company’s accounts. Together with the income statement and balance sheet, the statement of cash flows represents the minimum of financial reporting expected of public corporations on a quarterly basis.
Additionally, the income statement, statement of cash flows, and balance sheet are expected to accompany a business plan in a pro forma capacity at a minimum.
Exploring the Cash Flow Statement
The statement of cash flows is a handy tool for investors, financial decision makers, and creditors, to name a few. It indicates how a company’s operations are running—where its money is coming from and where it is being spent.
In the case of entrepreneurs who are seeking funding, a pro forma cash flow statement is a helpful indicator of the business’s ability to keep sufficient cash on hand to cover its liabilities. Creditors use the cash flow statement to evaluate the liquidity of a business and to help them understand the business’s ability to service debt.
The statement of cash flows is broken into three main components:
- Cash from operating activities
- Cash from investing activities
- Cash from financing activities
Cash from Operating Activities
This portion of the statement of cash flows details the amount of cash generated from and paid out with regard to business activities.
Cash generated from operating activities generally includes revenue from the sales of goods or services but may have other sources. Cash that is spent on operating activities generally consists of payments made to suppliers or vendors, salaries and wages paid to employees, rent payments, interest payments, and any other operating expenses.
Cash from Investing Activities
Investing activities cover the purchase or sale of assets, loans made to vendors or received from customers, or payments related to mergers and acquisitions. Additionally, because PPE (property, plant, and equipment) assets are generally significant capital investments, cash flows related to these assets are also found here.
Cash from Financing Activities
The final portion of the statement of cash flows details cash from financing activities. These generally include activities related to cash that moves between the business and its creditors.
Putting all of the pieces together you can see a full sample statement of cash flows below.