What Is A Cash Flow Statement?

What Is A Cash Flow Statement?
by Reem Heakal (Contact Author | Biography)

Cmplementing the balance sheet and income statement, the cash flow statement (CFS), a mandatory part of a company's financial reports since 1987, records the amounts of cash and cash equivalents entering and leaving a company. The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent. Here you will learn how the CFS is structured and how to use it as part of your analysis of a company.

 

The Structure of the CFS
The cash flow statement is distinct from the income statement and balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded on credit. Therefore, cash is not the same as net income, which, on the income statement and balance sheet, includes cash sales and sales made on credit. (To learn more about the credit crisis, read Liquidity And Toxicity: Will TARP Fix The Financial System?)

 

Cash flow is determined by looking at three components by which cash enters and leaves a company:

• core operations,
• investing and
• financing.

Analyzing an Example of a CFS


Let's take a look at this CFS sample
 

  

 

From this CFS, we can see that the cash flow for FY 2003 was $1,522,000. The bulk of the positive cash flow stems from cash earned from operations, which is a good sign for investors. It means that core operations are generating business and that there is enough money to buy new inventory. The purchasing of new equipment shows that the company has cash to invest in inventory for growth. Finally, the amount of cash available to the company should ease investors' minds regarding the notes payable, as cash is plentiful to cover that future loan expense.


Of course, not all cash flow statements look this healthy, or exhibit a positive cash flow. But a negative cash flow should not automatically raise a red flag without some further analysis. Sometimes, a negative cash flow is a result of a company's decision to expand its business at a certain point in time, which would be a good thing for the future. This is why analyzing changes in cash flow from one period to the next gives the investor a better idea of how the company is performing, and whether or not a company may be on the brink of bankruptcy or success.



Tying the CFS with the Balance Sheet and Income Statement

 

As we have already discussed, the cash flow statement is derived from the income statement and the balance sheet.

• Net earnings from the income statement is the figure from which the information on the CFS is deduced.
• As for the balance sheet, the net cash flow in the CFS from one year to the next should equal the increase or decrease of cash between the two consecutive balance sheets that apply to the period that the cash flow statement covers.

(For example, if you are calculating a cash flow for the year 2000, the balance sheets from the years 1999 and 2000 should be used.)

 

 

Conclusion

 

• A company can use a cash flow statement to predict future cash flow, which helps with matters in budgeting.
• For investors, the cash flow reflects a company's financial health: basically, the more cash available for business operations, the better.
• However, this is not a hard and fast rule. Sometimes a negative cash flow results from a company's growth strategy in the form of expanding its operations.

By adjusting earnings, revenues, assets and liabilities, the investor can get a very clear picture of what some people consider the most important aspect of a company: how much cash it generates and, particularly, how much of that cash stems from core operations.  

 

 

by Reem Heakal, (Contact Author
Biography)

 

http://www.investopedia.com/articles/04/033104.asp