The statement of cash flows is a key component of a company's annual financial statement package. Analyzing the cash flow statement can give you a snapshot of how successful the company is in collecting from its customers and managing its growth. A company that struggles with cash flow may run into trouble if business slows down unexpectedly.

Statement of cash flows: The basics

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There are three sections of a cash flow statement: Operating activities, investing activities, and financing activities. The statement of cash flows starts off with the company's net income for the reporting period. This net income figure is then adjusted upward or downward based on the changes in the balance sheet accounts since the prior reporting period.

Statement of cash flows: Operating activities

The cash flows from operating activities can either be reported with the direct method or the indirect method. The direct method of reporting cash flows uses the company's actual cash in and cash out. The indirect method is based on accrual accounting and includes cash that has not physically been received or spent. Direct reporting of cash flows is very rare in today's business environment, with most companies operating on accrual-based accounting. The choice of method only affects the operating activity section of the statement of cash flows. Cash flow from investing and financing activities will be reported the same way no matter which method is used.

To calculate the cash flows from operating activities, the beginning and ending account balances are compared. The most commonly used asset accounts include cash, inventory, accounts receivable, and prepaid expenses. The most commonly used liability accounts include accounts payable, depreciation, and other expenses that do not require the expenditure of cash. These expenses must be added back into the net income figure in order to calculate the actual cash that was spent during the period.

Statement of cash flows: Investment activities

The investment activity section of the statement of cash flows reflects the change in the company's equipment, investments, or capital assets. If the company sells off one of its capital assets during the period, this will be shown as a cash inflow. Conversely, the purchase of a capital asset or piece of equipment will be shown as a cash outflow. Investments in stocks or short-term bonds will also affect the cash flows from investment activity report.

Statement of cash flows: Financing activities

The financing activity section of the cash flows statement shows the changes in the company's dividends, loans, and issued stock or other debt. If the company issues new stock during the period or borrows money under a long-term loan agreement, there will be an inflow of cash on the statement of cash flows. Paying out dividends to stockholders or repurchasing previously issued shares of stock will be shown as an outflow of cash.

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