Definition: The statement of cash flows, also called the cash flow statement, is a financial statement that reports lists the inflows and outflows of cash during an accounting period. In other words, this report shows what activities generated money and what activities spent money during the course of the period.
What Does Statement of Cash Flows Mean?
The statement of cash flows is divided into three main sections based on the activities of the company: operating, investing, and financing. Operating activities consist of the business events that result in the bottom line of the company. Basically, these are the transactions that a company is in the business of doing.
For example, a retailer sells inventory. A manufacturer produces products and a dentist provides services. The cash received and spent to perform these normal business operations is reported in the operating section.
Investing activities consist of buying and selling long-term assets and other investments. You can think of this section as the amount of money a company invests in its own capital or traditional investments. A good example is purchasing a company vehicle or selling an available for sale security.
Financing activities consist of transactions designed to fund the operations of the company. Cash received from a bank loan, money spent repaying creditors, and dividends paid to shareholders are all reported in this section.
The entire point of the cash flows statement is to show how and where a company is earning and spending its cash. After all, a profitable company can have cash shortfalls and not be able to pay its bills. Management analyzes this financial report to understand why there might be a cash deficiency.
External users like investors and creditors look at the statement of cash flows to analyze trends in where cash is coming from. For example, if more cash is coming from financing than operations, investors know that the company is not making enough money from its core businesses to sustain itself. This could damage the business of time if it isn’t corrected.