Statement of Cash Flows Explained

A cash flow statement is difficult to understand. This includes educated finance individuals struggling to understand what the cash flows statement is about. Once you understand the statement, as a cash flows analysis, you will have a better understanding of how a business operates. You will also be able to track where the income is coming from.

The cash flow statement is one of the 3 major finical statements required for publicly traded companies to issue by the SEC. The SEC sees it as an important document for investors to analyze like the balance sheet and income statement. If I where to break this the definition down into simple terms, the statement of cash flows would be explained as:

The cash flow statement shows the inflows and outflow of cash. It also shows the analyst the cash sources that it comes from or is spent on.

Companies have manipulated their balance sheets and income statements to look appealing for investors. The cash flows statement shows a different story when it is analysed. An example of manipulation would be one major cooperation that we personally analysed.

They reported higher than normal profits from selling off its assets. At first glance they looked like they where outperforming the projections set by annalist, but when people started to take a closer look at the cash flow statement they new the earnings weren’t going to last more than a quarter.

Those aren’t earnings that should excite you as an investor. What you want to see is sustainable income from the companies operations. This actually comes from investing company funds into income producing investments. Liquidating assets to show a higher profit in the short run doesn’t help the business in the long run.

Statement of Cash Flows Sections Outline

This statement has 3 parts called the operating, Financing, and investing sections. On this page, the goal is to give you basic definitions. We will go much deeper into each of these subjects. To make this easy to follow there will be links to the sub-pages as they get built.

The cash flows operating activities include

  1. Generated income from the company assets
  2. Cash flows from increases in business value
  3. This is the companies cash from their primary source of income
  4. Crucial for the company to continue as a going concern
  5. Non Cash Transactions are added back such as depreciation expense

The cash flows from investing activities include

  1. The inflows and outflows from investing
  2. This shows the sales and purchases of new property, plant and equipment assets
  3. This will show a gain or loss from the sale of P.P.E.

The cash flows from investing activities include

  1. The inflows and outflows from investing
  2. A major part of this section is the outflows from paying dividends
  3. This will show the shares of treasury stock purchased during the quarter
  4. This section will show an inflow from selling company stock or issuing loans.
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