A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources. It also includes all cash outflows that pay for business activities and investments during a given period.
A company's financial statements offer investors and analysts a portrait of all the transactions that go through the business, where every transaction contributes to its success. The cash flow statement is believed to be the most intuitive of all the financial statements because it follows the cash made by the business in three main ways—through operations, investment, and financing. The sum of these three segments is called net cash flow.
These three different sections of the cash flow statement can help investors determine the value of a company's stock or the company as a whole.
Every company that sells and offers its stock to the public must file financial reports and statements with the Securities and Exchange Commission (SEC). The three main financial statements are the balance sheet and income statement. The cash flow statement is an important document that helps open a wind interested parties insight into all the transactions that go through a company.
There are two different branches of accounting—accrual and cash. Most public companies use accrual accounting, which means the income statement is not the same as the company's cash position. The cash flow statement, though, is focused on cash accounting.
Profitable companies can fail to adequately manage cash flow, which is why the cash flow statement is a critical tool for companies, analysts, and investors. The cash flow statement is broken down into three different business activities: operations, investing, and financing.
Let's consider a company that sells a product and extends credit for the sale to its customer. Even though It recognizes that sale as revenue, the company may not receive cash until a later date. The company earns a profit on the income statement and pays income taxes on it, but the business may bring in more or less cash than the sales or income figures.