What is the cash flow statement and why it matters

• Defines the cash flow statement: shows sources and uses of funds and the cash balance; clarifies cash impact vs. profit measures; essential for liquidity and solvency assessment.
• Significance: informs budgeting, investment appraisal, debt management; key performance dimension for a business.
• Relationship to other statements: complements the Profit & Loss (P&L) statement and the Balance Sheet (BS); shows how cash was affected during the period by operating, investing, and financing activities, linking to the P&L and opening/closing BS.
• Conceptual snapshot: Profit & Loss (accrual) → Beginning BS → Cash flow statement shows cash changes due to activities → Ending BS cash balance.

Relationship to P&L and Balance Sheet

• Flow sequence: P&L generates the period's result; Beginning BS provides opening positions; Cash flow statement shows cash impact of activities; End BS reflects updated balances after cash movements.
• Core takeaway: A cash flow statement translates the income statement into actual cash movements, enabling assessment of liquidity and cash-based solvency.

Format/Structure of the Cash Flow Statement

• Three activities: Cash Flows from Operating Activities (CFO), Investing Activities (CFI), Financing Activities (CFF).
• Net change in cash during the period = $CFO + CFI + CFF$.
• Ending cash balance = Beginning cash balance + Net change in cash during the period.
• Typical layout (conceptual): CFO → CFI → CFF → Net change in cash during period → Beginning cash balance → Ending cash balance.
• Cash flow identity across statements: Ending cash balance = Beginning cash balance + (CFO + CFI + CFF).

Cash balance reconciliation (opening/closing)

• Operating activities (CFO): receipts from customers; payments to suppliers/employees; receipts/payments of taxes and GST; interest, etc.
• Investing activities (CFI): acquisition/disposal of long-term assets; other investments; expansion/contraction of operating capacity.
• Financing activities (CFF): changes in contributed capital and financial debt; share issues; loans; buy-backs; interest/dividends.
• Analytical prompts: Where did cash come from last year? How was it used? Did operating activities cover cash needs? If not, was the gap financed by debt or equity or asset sales? Is cash surplus used for debt repayment, investments, or dividends?

Why has cash balance decreased even if operations were profitable?

• Cash flow components can differ from accounting profit due to timing, non-cash items, and non-operating cash movements.
• CFO positives may be offset by investing/financing outflows (e.g., asset purchases, debt repayments, dividends).
• Common examples: Acquisition of subsidiary, purchase of PPE, proceeds from asset sales, interest/dividends received; financing activities like new borrowings or repayments and dividends paid.

Worked example (illustrative data)

• Structure shown: Net cash from operating activities; net cash used in/from investing activities; net cash used in/from financing activities; Net increase in cash and cash equivalents; Cash at beginning; Cash at end.
• Purpose: illustrates how CFO, CFI, and CFF combine to yield the period’s net cash movement and ending cash balance.

Practical takeaways

• Use CFO to assess liquidity: can operating cash cover ongoing activities?
• Plan financing and investment based on cash flow trends (debt vs equity; ability to fund capex from CFO).
• Evaluate debt servicing capacity, dividend policy, and capex plans from cash flow details.
• Identify non-cash items and their impact on profitability versus cash generation.

Quick recap

• The cash flow statement complements the P&L and BS by detailing actual cash movements and liquidity implications.
• It is structured around three activities: operating, investing, and financing, each with representative examples.
• The net change in cash reconciles the opening and closing cash balances and links to the overall cash position on the BS.