Cash Flow Statement Basics

Χ The statement shows cash flow from operations, from investing, and from financing. The total of operating, investing, and financing cash flows equals the change in cash, through an algebraic identity.

Χ Cash flow from operations is cash collected from the sales of goods and services and from investments (e.g., interest and dividends), less cash spent for operating expenses. These include cash paid to suppliers, employees, interest, tax, and other miscellaneous operating expenses. The term operating cash flow is a net concept.

Χ Cash flow from investing is cash spend on investments such as marketable securities, investments, PP&E, land, and patents, less cash received from the sales of these types of investments. The term investing cash flow is a net concept. In most cases, investing cash flow is negative.

Χ Cash flow from financing is cash generated from the issuance of debt and the sale of stock, less cash spent for dividends, debt repayment, and the purchase of stock. Again, the term financing cash flow is a net concept.

Χ In a sense, the objective of any business is to generate negative cash flows from financing, which represents the payback for equity and debt financiers. Any investment made in the company is done with the expectation that one day, the firm will be able to internally support substantial amounts of negative financing cash flows.

Χ Non-cash transactions do not affect the cash flow statement. For example, if a firm acquires equipment through the issuance of a note payable, the increase in equipment does not represent an investing use of cash and the issuance of the note does not represent a financing source of cash.

Χ The amount of gain or loss on a sale of assets has no bearing on investing cash flows; it is only the amount of cash received that affects investing cash flows.

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