Understanding Cash Flow Statements

Vocabulary practice cards reviewing core definitions, components, and preparation methods for cash flow statements.

Cash Flow Statement

A financial report showing how money flows in and out of a company through operating, investing, and financing activities, helping investors evaluate liquidity and overall financial health.

Liquidity

A measure of how well a business generates cash to fund its growth and meet its financial obligations.

Operating Activities

The section of the cash flow statement that records cash flows from core business operations, including cash received from customers and cash paid to suppliers and employees.

Investing Activities

The section of the cash flow statement that tracks cash movements related to long-term investments, such as capital expenditures, asset sales, and acquisition of securities.

Financing Activities

The segment of the cash flow statement showing how a company raises and repays capital through debt and equity, including issuing stock, borrowing funds, loan repayments, and dividends.

Direct Method

A method of preparing operating cash flows that lists actual cash receipts and payments from core operations, preferred under International Financial Reporting Standards (IFRS) but rarely used.

Indirect Method

A method of preparing operating cash flows that starts with net income from the income statement and adjusts for non-cash items and working capital changes; accepted by both IFRS and GAAP.

Net Income

A measure of company profitability calculated using accrual accounting, which recognizes revenues and expenses when earned or incurred rather than when cash changes hands.

Depreciation

A non-cash expense that reduces net income on the income statement without an immediate cash outflow, requiring it to be added back to net income in the indirect method.

Capital Expenditures (Capex)

Cash outflows recorded under investing activities to acquire, upgrade, or maintain long-term physical assets such as equipment or property.

Financial Red Flags

Warning indicators on a cash flow statement including declining or negative operating cash flow, excessive reliance on external financing, frequent asset sales, and a high cash burn rate.

Direct vs. Indirect Method Comparison

A side-by-side comparison illustrating that the direct method lists actual cash transactions with greater transparency but complex preparation, while the indirect method adjusts net income, is easier to prepare, and is used by most large corporations.

Example Corporation Statement of Cash Flows (2025)

A sample cash flow statement for the year ended December 31, 2025, showing net operating cash flow of $262,000, net investing cash flow of -$260,000, net financing cash flow of $90,000, and ending cash of $193,000.