The Cash Flow Statement has been a required financial statement since 1987. It complements the Balance Sheet and the Income Statement reporting just how much actual cash flowed in and out of a company. The Cash Flow Statement shows how a company is operating, where its cash is coming from and where its cash is being spent. Unlike the balance sheet and the income statement, the cash flow statement does not record future transactions such as items sold on credit or accrued expenses.
There are three different parts of the Cash Flow Statement, cash flow from operations, cash flow from investing and cash flow from financing.
The cash flow is built by making adjustments to the net income of a firm by adding the changes in different accounts on the income statement and the balance sheet. These changes need to be recorded because when added to the net income they will show the real amount of cash that flowed in and out of the firm.
If an asset increases then it is a use of cash and if it decreases it is a source of cash. If a liability increases then it is a source of cash and if it decreases then it is a use of cash.
Operations
Cash flow from operations records the flow of cash from a firm's core purpose. Most of the time the Total Cash Flow from operations does not equal operating income. This is because most companies sell a large amount of merchandise or services on credit. Generally changes in Accounts Receivables, depreciation, Inventory , and accounts payable reflect the Operating Cash Flow when added to net income. Depreciation is not an actual cash expense so if a company recorded a net income of $1000 and a Depreciation Expense of $50. It would add $50 to the net income of $1000. The same applies to the other accounts mentioned, if accounts receivable increased then it would need to be subtracted from the net income because the firm did not actually receive cash for those transactions. The same logic holds for all other accounts reported on the income statement.
Investing
Cash flow from investing would come from activities such as the purchase or sale of new equipment, buildings, and other similar items. Often times if a company is growing rapidly it's capital spending will be greater than its operating and financing cash flow which will result in a negative total cash flow. This is not always a bad thing but it obviously could not continue as a long-term trend.
Financing
Changes in financing cash flow are cash in-flows when financing such as issuing debt or Equity occurs.
