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About this lesson
The Cash Flow Statement is a financial report that shows how well the company was able to convert business activity into cash over some time period.
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Quick reference
Cash Flow Statement Part 1
The Cash Flow Statement is a financial report that shows how well the company was able to convert business activity into cash over some time period.
When to Use Cash Flow Statements
Cash Flow Statements are calculated for some time period, typically a month, quarter, or year. It is often used in conjunction with the Earnings Statement and Balance Sheet to ensure a complete picture of financial health of a company.
Instructions
- The Cash Flow Statement is focused on the generation and use of cash.
- The Cash Flow Statement starts with the Net Income for the time period as calculated on the Earnings Statement.
- The Cash Flow Statement looks at the change in the balance of business accounts over the time period to determine if they reflect an increase in cash or a use of cash.
- The Cash Flow Statement categories the accounts into three categories: Cash for Operating Activities, Cash from Investing Activities, and Cash from Financing Activities.
- Normally cash from Operating Activities and Financing Activities are used on Investing Activities.
- A company could have a negative Net Income yet have a positive cash flow – for example if they borrowed money and increased debt.
- A company could have a positive Net Income yet have a negative cash flow – for example if they made a major investment purchase.
- The personal equivalent to the Cash Flow Statement is your wallet or checkbook.
Hints and Tips
- Many companies will subdivide some of these accounts for greater insight.
- Investments may be divided into facilities, equipment, and acquisitions.
- Depreciation is added into the Cash from Operating Activities because the depreciation represents the value of investments so it has already been accounted for under Cash from Investing Activities – but the depreciation charge has reduced the reported Net Income level so it must be credited back. More on this when we discuss capitalization and depreciation.
- There are often both sources of cash and uses of cash in each of the three categories.
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