Statement of Cash Flows
What does it mean
The Statement of Cash Flows is a financial report similar to a Balance Sheet and Income Statement, but the goal of this statement is reconcile where cash was spent or received during a specified time period.
The Statement of Cash Flows comes in two primary formats: Direct and Indirect.
In both formats, the statement is broken into three sections: Cash Flows from Operations, Cash Flows from Investing and Cash Flows from Financing. Within each section, the amount of cash spent or received from various destinations/sources is identified. Where the two methods deviate from each other is specifically within the Cash Flows from Operations
Cash Flows from Operations - Direct Method
In the direct method, the cash flows from operations is broken into cash spent/received from Customers, Suppliers, Employees and Taxes.
Cash Flows from Operations - Indirect Method
In the indirect method, the cash flows from operations is backed into based on changes to various balance sheet items during the timeframe. If accounts receivable increased from the beginning until the end, it means that the cash has not been received from all of the sales during the timeframe; so that net increase in accounts receivable is shown as a negative “use” of cash.
Why does it matter
The Statement of Cash Flows is definitely the least used of the big three financial statements (Balance Sheet, Income Statement & Statement of Cash Flows), but it does contain some valuable nuggets of information. Here are a few rules of thumbs:
- Cash Flows from Operations should consistently be positive - this means that the true purpose of why the business exists is producing a positive cash flow.
- Cash Flows from Investing activities should be consistently zero or negative - this means that the business is investing into long term asset to improve their business. If you see this figure be consistently positive (especially if operating cash flow is negative) then the business may be liquidating assets to supplement its negative cash flow.
Other Relevant Terms
Want to Master Banking's Favorite Ratio?
The Debt Service Coverage Ratio (DSCR) is one of banking's favorite ratios. Want to ace it without breaking a sweat? No problem! We've got some simple, no-fuss pointers that will help you nail this ratio every time. You've got this!
Get the Cheatsheet NowNot Finding What You Are Looking For?
Let me know what terms, ratios or content you want to see covered.
Request Term or Ratio
Am I missing a key term or ratio? Let me know what you want to see covered.
Request Content
Do you have a topic idea you'd like to see covered? Send it my way.
Checkout Courses
Enhance your skills through a deeper understanding of your customers' businesses.
A bit about me
Greetings! I'm Clay Sharkey, and there is nothing I like more than assisting others in achieving their goals. I firmly believe that by enhancing a banker's understanding of their customer's' business, they can provide superior service. This superior service, in turn, leads to stronger relationships for the bank, improved performance for the businesses, and better experiences for our communities. Win-win-win.
