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Investment guides
Information and guides for the new or potential investor.
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| Statement Basics: Statement of Cash Flows |
Purpose
The statement of cash flows reports the flow of cash into and out of a company in a given year.
Cash is a company's lifeblood. Cash includes currency, checks on hand, and deposits in banks. Cash equivalents are short term, temporary investments — such as treasury bills, certificates of deposit, or commercial paper — that can be quickly and easily converted to cash.
A company uses cash to pay bills, repay loans, and make investments, allowing it to provide goods and services to customers. If all goes well, a company uses cash to generate even more cash as a result of higher profits.
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Key numbers
The statement of cash flows reports the company's sources and uses of cash and the beginning and ending values for cash and cash equivalents each year. It also includes (near the bottom of the statement) the combined total change in cash and cash equivalents from all sources and uses of cash.
Key numbers in this statement show results of transactions in three categories that are sources and uses of cash:
 Net cash provided (or used) by operating activities
Net cash provided (or used) by investing activities
Net cash provided (or used) by finance activities
Net cash provided (or used) by operating activities
A company generates cash just from operating its business. Therefore, the first key number is net cash provided from operating activities. This total includes some items from the statement of earnings; for example:
- Net earnings, showing the company's profit (or loss)
- Depreciation expense
This key number also includes changes in some items from the statement of financial position:
- Inventory changes (increases in inventories use cash and reductions provide cash)
- Changes in accounts receivable, the sales the company has not yet been paid for (again, increases use cash and decreases provide cash)
- Changes in accounts payable, the cash a company owes its vendors and suppliers (in this area, increases provide cash and decreases use cash)
The statement of cash flows adds the net cash from each type of operating activity and reports the company's total net cash provided (or used) by all operating activities.
Net cash provided (or used) by investing activities
The second key number might include investments in property (land), plant (factories and assembly plants), and equipment (machines, trucks, computer systems, telephone systems). Investing in such assets is a use of cash, selling them is a source of cash.
Examples of investing activities are overhauling trucks to extend their years of use or renovating factories and assembly plants to be more productive.
The statement of cash flows adds the net cash from each type of investing activity and reports the company's total net cash provided (or used) by all investing activities.
Net cash provided (or used) by financing activities
The third key number includes the sources and uses of cash for financing activities. Sources of cash include what a company raises by selling stocks and bonds and by borrowing from banks.
Uses of cash include buying back stock from stockholders , paying dividends to share profits with stockholders and repaying borrowed cash.
The statement of cash flows adds the net cash from each type of financing activity and reports the company's total net cash provided (or used) by all financing activities.
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Net cash provided (or used) by operating activities
