Cash Flow Statement

Cash Flow Statement

A financial statement showing how cash came into and went out of a company over a period, split into operating, investing, and financing activities. Example: The store's cash fell from $26,510 to $25,000 during the year. Formula: Net change in cash = Cash from operating + Cash from investing + Cash from financing

Cash Flow vs. Net Income

Net income uses accrual accounting and includes non-cash items, so it can differ from the actual cash a company brings in. Example: The store earned $24,490 in net income but generated $30,490 in operating cash. Formula: Operating cash flow = Net income ± Non-cash items ± Changes in working capital

Cash Equivalents

Very safe, short-term investments that can be turned into cash almost instantly, usually maturing within 3 months; counted together with cash. Example: A 60-day Treasury bill counts as a cash equivalent. Formula: Cash and cash equivalents = Cash on hand + Bank balances + Investments maturing within 3 months

Operating Activities

Cash flows from the company's main day-to-day business, such as selling products, paying suppliers, and paying employees. Example: The store's operating activities produced $30,490 of cash. Formula: Cash from operating activities (CFO) = Net income + Non-cash expenses − Non-cash gains ± Changes in working capital

Indirect Method

The most common way to report operating cash flow; it starts with net income and adjusts for non-cash items and working capital changes. Example: $24,490 + $5,000 − $2,000 − $3,000 + $2,000 − $1,000 + $4,000 + $1,000 = $30,490. Formula: CFO = Net income + Depreciation and amortization − Gains + Losses − Increases in current assets + Decreases in current assets + Increases in current liabilities − Decreases in current liabilities

Direct Method

A way to report operating cash flow by listing actual cash received and paid, such as cash collected from customers and cash paid to suppliers. Example: Cash collected from customers = $187,000 net sales − $3,000 increase in AR = $184,000. Formula: CFO = Cash received from customers − Cash paid to suppliers − Cash paid to employees − Cash paid for other expenses, interest, and taxes

Non-Cash Expenses

Expenses that reduce net income but don't use cash, so they are added back in operating activities. Example: The store adds back $5,000 of depreciation. Formula: Added back to net income: Depreciation + Amortization + Stock-based compensation + Other non-cash charges

Depreciation and Amortization Add-Back

Adding depreciation and amortization back to net income because they reduced profit without using any cash. Example: $24,490 net income + $5,000 depreciation. Formula: Net income + Depreciation + Amortization

Gain or Loss on Sale of Assets Adjustment

Gains are subtracted and losses are added back in operating activities, because the full cash from the sale is reported in investing activities instead. Example: The store subtracts its $2,000 gain on selling equipment, since the full $8,000 of proceeds appears under investing. Formula: CFO adjustment = − Gains + Losses

Changes in Working Capital

Adjustments in operating activities for changes in current assets and current liabilities, which show timing differences between earning or spending and actually moving cash. Example: The store's working capital changes add $3,000 to operating cash flow overall. Formula: Increase in current asset = subtract; Decrease in current asset = add; Increase in current liability = add; Decrease in current liability = subtract

Increase in Accounts Receivable

Means sales were made on credit but cash hasn't been collected yet, so it is subtracted from net income. Example: AR rose by $3,000, so the store subtracts $3,000. Formula: Change in AR = Ending AR − Beginning AR (an increase is subtracted)

Decrease in Inventory

Means the company sold inventory it already paid for in earlier periods, so it is added back. Example: Inventory fell from $30,000 to $28,000, so the store adds $2,000. Formula: Change in inventory = Ending inventory − Beginning inventory (a decrease is added)

Increase in Prepaid Expenses

Means cash was paid now for future expenses, so it is subtracted. Example: Prepaid insurance rose by $1,000, so the store subtracts $1,000. Formula: An increase in prepaid expenses is subtracted

Increase in Accounts Payable

Means the company recorded expenses but hasn't paid the cash yet, so it is added back. Example: AP rose by $4,000, so the store adds $4,000. Formula: Change in AP = Ending AP − Beginning AP (an increase is added)

Increase in Accrued Expenses

Means expenses were recorded but not yet paid in cash, so it is added back. Example: Wages payable rose by $1,000, so the store adds $1,000. Formula: An increase in accrued liabilities is added

Investing Activities

Cash flows from buying and selling long-term assets and investments. Example: The store's investing activities used $12,000 of cash ($15,000 equipment purchase − $8,000 equipment sale + $5,000 bond purchase). Formula: Cash from investing (CFI) = Proceeds from selling assets and investments − Purchases of assets and investments

Capital Expenditures (CapEx)

Cash spent buying or improving long-term physical assets like equipment, buildings, or vehicles. Example: The store spends $15,000 on new display racks and registers. Formula: CapEx = Ending PP&E − Beginning PP&E + Depreciation (approximate, for net PP&E)

Proceeds from Sale of Assets

Cash received from selling long-term assets; reported in investing activities. Example: The store sells old equipment for $8,000 cash. Formula: Proceeds = Book value + Gain (or − Loss) ($6,000 + $2,000 = $8,000)

Purchase or Sale of Investments

Cash spent buying, or received from selling, stocks, bonds, or other investments; reported in investing activities. Example: The store buys $5,000 of bonds. Formula: Reported as cash outflow for purchases and inflow for sales

Financing Activities

Cash flows between the company and its owners and lenders, such as borrowing, repaying debt, issuing or buying back stock, and paying dividends. Example: The store's financing activities used $20,000 ($5,000 loan repayment + $10,000 dividends + $5,000 stock buyback). Formula: Cash from financing (CFF) = Debt issued + Stock issued − Debt repaid − Stock repurchased − Dividends paid

Issuance of Debt

Cash received from borrowing money through loans or bonds; a financing inflow. Example: A company takes out a $30,000 bank loan. Formula: Reported as a cash inflow in financing activities

Repayment of Debt

Cash used to pay back the principal on loans or bonds; a financing outflow. Interest paid is usually reported in operating activities under U.S. GAAP. Example: The store repays $5,000 of its bank loan principal. Formula: Reported as a cash outflow in financing activities

Issuance of Stock

Cash received from selling new shares to investors; a financing inflow. Example: A company sells 1,000 shares at $20 each, raising $20,000. Formula: Cash received = Shares issued × Issue price

Stock Repurchase (Share Buyback)

Cash used to buy back the company's own shares; a financing outflow that creates treasury stock. Example: The store buys back 500 shares at $10 each for $5,000. Formula: Cash paid = Shares repurchased × Price per share

Dividends Paid

Cash paid to shareholders as a share of profits; a financing outflow under U.S. GAAP. Example: The store pays $10,000 in dividends. Formula: Dividends paid = Dividends declared − Increase in dividends payable (or + Decrease)

Net Change in Cash

The total increase or decrease in cash during the period from all three activities. Example: $30,490 − $12,000 − $20,000 = −$1,510. Formula: Net change in cash = CFO + CFI + CFF

Beginning and Ending Cash Balance

The cash at the start and end of the period; the ending balance must match cash on the balance sheet. Example: $26,510 beginning − $1,510 = $25,000 ending, matching the balance sheet. Formula: Ending cash = Beginning cash + Net change in cash

Free Cash Flow (FCF)

Cash left over from operations after paying for capital expenditures; shows cash available for debt repayment, dividends, or growth. Example: $30,490 − $15,000 = $15,490. Formula: Free cash flow = Cash from operating activities − Capital expenditures

Operating Cash Flow Ratio

Measures whether operating cash can cover current liabilities. Example: $30,490 ÷ $32,000 = 0.95. Formula: Operating cash flow ratio = Cash from operating activities ÷ Current liabilities

Cash Flow Margin

The percentage of each sales dollar that becomes operating cash. Example: $30,490 ÷ $187,000 = 16.3%. Formula: Cash flow margin = Cash from operating activities ÷ Net sales × 100

Quality of Earnings Ratio

Compares operating cash flow to net income; above 1 suggests profits are backed by real cash. Example: $30,490 ÷ $24,490 = 1.24. Formula: Quality of earnings = Cash from operating activities ÷ Net income

Cash Interest and Taxes Paid (Supplemental Disclosure)

The actual cash paid for interest and income taxes, often listed at the bottom of the cash flow statement when the indirect method is used. Example: The store paid $4,000 in interest and $4,510 in taxes during the year. Formula: Cash taxes paid = Income tax expense − Increase in taxes payable (simplified)

Non-Cash Investing and Financing Activities

Significant transactions that involve no cash, disclosed separately at the bottom of the statement. Example: A company buys a $60,000 truck by signing a note payable, with no cash changing hands. Formula: Not included in the three cash flow sections; disclosed in a note or schedule