A cash flow statement is a financial statement that tracks the inflow and outflow of cash within a business during a specific period. It helps assess a company’s liquidity, solvency, and overall financial health by detailing cash generated from operating activities, investing activities, and financing activities. It’s a crucial tool for investors, creditors, and management to understand how cash moves in and out of a business.
A cash flow statement typically consists of three main sections:
1. Operating Activities: This section reports cash inflows and outflows from the business’s primary activities, such as revenue from sales, payments to suppliers, salaries, and taxes. It essentially shows how much cash is generated or used in the company’s day-to-day operations.
2. Investing Activities: Here, the cash flows related to the purchase and sale of long-term assets are recorded. This includes investments in property, plant, equipment, and securities and any proceeds from the sale of these assets.
3. Financing Activities: This section accounts for cash flows related to the company’s financing activities, such as issuing or repurchasing stock, issuing or repaying debt, and paying dividends. It shows how the company raises capital and how it distributes it to investors and creditors.
The cash flow statement provides insights into a company’s ability to generate cash, its investment decisions, and its financing structure. By analyzing these three sections, investors and analysts can evaluate a company’s liquidity, its ability to meet its financial obligations, and its long-term sustainability.