How to Understand a Statement of Cash Flow

Use the cash flow statement to determine the sources of funds.

There are three primary financial statements, they are the income statement, the balance sheet, and the cash flow statement. Each one provides the analyst or investor with additional knowledge about the performance of the company. The cash flow statement is a combination of the income statement and the balance sheet. It provides information about the sources and uses of cash and categorizes cash flow based on three different cash flow activities: cash flow from operations, cash flow from investing and cash flow from financing activities.

Difficulty:

Moderately Easy

Instructions

1. Understand cash flow notations. The cash flow statement shows inflows and outflows. Outflows are shown with "()". For instance, an outflow of $100 is shown as ($100).

2. Review the section titled cash flow from operations. Cash flow from operations is the first section on the cash flow statement. It provides an overview of the cash flow generated by company operations. Go through each line item to determine the inflows and outflows of cash from operations.

3. Walk through the segment titled cash flow from investing. Companies may purchase items which can be sold for a profit in the future and that profit or loss is not related to operations. This cash flow is referred to as cash flow from operations. Investments in securities or real estate are examples of items which may fall into cash flow from investments.

4. Review cash flow from financing. Cash flow from financing is the cash flow received from investors such as stock and bond holders. A cash outflow is the money paid for the use of funds such as interest and dividends. A cash inflow represents the money raised from a stock or bond issuance.

References

• SEC: Beginners' Guide to Financial Statements