What is Cash Flow Statement?

The Cash Flow Statement (CFS) is a financial statement that reconciles net income based on the actual cash inflows and outflows in a period.

Often used interchangeably with the term, “statement of cash flows,” the cash flow statement tracks the real inflows and outflows of cash from operating, investing and financing activities over a pre-defined period.

Key Takeaways

  • The cash flow statement (CFS) is a financial report that details actual cash inflows and outflows over a specific period, reconciling net income with cash movements from operating, investing, and financing activities.
  • There are two methods for preparing a cash flow statement: the indirect method, which adjusts net income for non-cash items and changes in working capital, and the direct method, which lists cash receipts and payments directly.
  • The cash flow statement (CFS) consists of three main sections: Cash Flow from Operating Activities (CFO), Cash Flow from Investing Activities (CFI), and Cash Flow from Financing Activities (CFF), resulting in the net change in cash for the period (and ending cash balance).
  • The cash flow statement (CFS) reconciles net income for discrepancies between accrual accounting profits and actual cash flows, addressing issues such as depreciation, stock-based compensation, and changes in working capital that can potentially be misleading.

How to Prepare a Cash Flow Statement

The cash flow statement (CFS), along with the income statement and balance sheet, represent the three core financial statements.

In accounting and finance, the cash flow statement (CFS), or “statement of cash flows,” matters because the financial statement reconciles the shortcomings of the reporting standards established under accrual accounting.

Components of the Cash Flow Statement

Format Description
Cash Flow from Operating Activities (CFO) - The section’s top-line item is net income, which is adjusted by adding back non-cash expenses, such as D&A and stock-based compensation, and then adjusted for changes in working capital line items.
Cash Flow from Investing Activities (CFI) - In the next section, investments are accounted for, with purchases of PP&E (i.e. capital expenditures, as the major recurring outflow), followed by business acquisitions and divestitures.
Cash Flow from Financing Activities (CFF) - In the final section, the net cash impact of raising capital from issuing equity or debt from outside investors, share repurchases (i.e. buybacks), repayments of financial obligations, and the issuance of dividends are taken into account.

Cash Flow Statement Formula

If the three sections are added together, we arrive at the “Net Change in Cash” for the period.

Net Change in Cash = Cash from Operations + Cash from Investing + Cash from Financing

Subsequently, the net change in cash amount will then be added to the beginning-of-period cash balance to calculate the end-of-period cash balance.

Ending Cash Balance = Beginning Cash Balance + Net Change in Cash

Cash Flow Statement Example: Apple (AAPL)

The following is a real-world example of a cash flow statement prepared by Apple (NASDAQ: AAPL) prepared under GAAP accrual accounting standards.

How are the 3-Statements Linked?

Assuming the beginning and end of period balance sheets are available, the cash flow statement (CFS) could be put together—even if not explicitly provided—as long as the income statement is also available.

  • Net Income ➝ Net income from the income statement flows in as the starting line item on the cash flow from operations section of the CFS.
  • Change in NWC ➝ Net working capital (NWC) line items on the balance sheet are each tracked on the CFS.
  • Capex and PP&E ➝ Cash outflows from the purchase of long-term fixed assets (PP&E) are accounted for in the capital expenditures (Capex) line item of the cash flow from investing section.

Cash Flow Statement Calculation Example

The net income of $18m is the starting line item of the CFS.

In the “Cash from Operations” section, the two adjustments are the:

  • (+) D&A: $10m
  • (–) Increase in NWC: $20m

Next, the only line item in the “Cash from Investing” section is capital expenditures, which in Year 1 is assumed to be:

  • (–) Capex: $40m

Likewise, the only “Cash from Financing” line item is the mandatory debt amortization (i.e. required pay down of debt principal):

  • (–) Mandatory Debt Amortization: $5m

The beginning cash balance, which we get from the Year 0 balance sheet, is equal to $25m, and we add the net change in cash in Year 1 to calculate the ending cash balance.

  • Cash from Operations: $48m
  • (+) Cash from Investing: -$40m
  • (+) Cash from Financing: -$5m
  • Net Change in Cash: $3m

Upon adding the $3m net change in cash to the beginning balance of $25m, we calculate $28m as the ending cash.

  • Beginning Cash: $25m
  • (+) Net Change in Cash: $3m
  • Ending Cash: $28m

4. Balance Sheet Calculation Example

On the Year 1 balance sheet, the $28m in ending cash that we just calculated on the CFS flows into the current period cash balance account.