Learn It 16.2.5: Financial Statements

Statement of Cash Flows

Net profit or loss is one measure of a company’s financial performance. However, creditors and investors are also extremely interested in how much cash a business generates and how it is used. The statement of cash flows is a summary of the money flowing into and out of a firm. It is the financial statement used to assess the sources and uses of cash during a certain period, typically one year. All publicly traded firms must include a statement of cash flows in their financial reports to shareholders. The statement of cash flows tracks the firm’s cash receipts and cash payments. It gives financial managers and analysts a way to identify cash flow problems and assess the firm’s financial viability.

The statement of cash flows classifies cash receipts and disbursements as operating, investing, and financing cash flows. Both inflows and outflows are included within each category.

Note that parentheses are used to distinguish negative cash flows in accounting statements. When an amount is enclosed in parentheses, it signifies that it represents a cash outflow or a reduction in cash that is subtracted, such as the (3,200) in the table below.
Metro Courier Inc.
Statement of Cash Flows
Month Ended January 31, 20XX
 
Cash flows from operating activities $ 50,000
Cash flows from investing activities    20,000
Cash flows from financing activities    (3,200)
       Net Increase (Decrease) in cash    66,800
Cash at the beginning of the month    0
Cash at the end of the month $ 66,800
  • Operating Activities  – Tracks cash related to the operations of the business, typically includes changes in current asset and current liability accounts. Examples of inflows include cash received from sales and interest received from loans and other investments. Examples of outflows include payments to buy inventory and pay employees.
  • Investing Activities – Tracks cash related changes in other assets outside of the operation of the business. Examples of inflows include cash generated by selling assets like equipment, buildings, or machinery. Examples of outflows include the purchase of long-term assets and investments.
  • Financing Activities – Tracks cash used to fund the business by raising capital through investors (equity) or loans (liabilities) as well as the repayment of loans.