The Cash Flow Statement is one of the three financial statements that are used to value a company and it shows actual inflows and outflows of cash. The Cash Flow Statement is constructed using the Balance Sheet and Income Statement and other relevant data. It usually starts with Net Income and adjusts that value to find Cash & Cash Equivalents. Net Income needs to be adjusted in the Cash Flow Statement because it includes factors which either have not been paid / received yet (such as Accrued Expenses and Accounts Receivable) or which are not actually measured in cash (Depreciation, Amortization etc). The process of creating the Cash Flow Statement is to go through every entry in the Balance Sheet and Income Statement and adjust for anything that is recorded as having value, but has a different effect on cash. The reason for removing non-cash entries is that whilst the Balance Sheet and Income Statement may tell you what a company owns or is worth, they do not actually show whether the company is losing or gaining money. Some examples are listed below:
- Depreciation – this is removed as although the asset has lost value, no actual cash has been spent or lost.
- Purchases of Securities – in terms of assets this is an increase in value, but cash is being spent to acquire them so this would reduce cash on the Cash Flow Statement.
- Accounts Receivable – although the company has sold products and is owed money which adds value to the firm, this cash has not actually been received and therefore has to be reduced on the Cash Flow Statement.
The Cash Flow Statement is split into 3 sections: Operating Activities, Investing Activities and Financing Activities:
- Operating Activities – refers to general costs of running the business such as Inventory, Accrued Expenses, Research & Development.
- Investing Activities – refers to the purchase, sale and maturity of investments as well as any Capital Expenditures. Essentially this includes anything that is used to enhance the business without being directly related to product sales.
- Financing Activities – refers to raising and paying off of debt as well as share actions (dividends, share buy-backs etc).
To learn more about this concept and become a master at Financial Statement modeling, you should check out our FSM Modeling Course. Learn more here.
Module 1: Getting Started
Module 2: Fundamental Concepts
Module 3: The Income Statement
Module 4: Working Capital
Module 5: PP&E and Intangibles
Module 6: The Cash Flow Statement
Module 7: Debt & Interest Schedule
Module 8: Finishing Your Model
Module 9: Bonus
- Accounts Payable (AP)
- Accounts Receivable (AR)
- Accrued Expenses
- Accrued Income
- Balance Sheet (BS)
- Capital Expenditure (CapEX)
- Cash & Cash Equivalents (CCE)
- Deferred Income Tax
- Deferred Revenue
- Deferred Tax Asset
- Deferred Tax Liability
- Financial Statements
- Intangible Assets
- Income Statement (IS)