Cash flow statements report a company’s inflows and outflows of cash. This is important because a company needs to have enough cash on hand to pay its expenses and purchase assets. While an income statement can tell you whether a company made a profit, a cash flow statement can tell you whether the company generated cash.
By using the information from a company’s balance sheet and income statement the bottom line of the cash flow statement shows the net increase or decrease in cash for the period. Generally, cash flow statements are divided into three main parts. Each part reviews the cash flow from one of three types of activities:
For most companies, this section of the cash flow statement reconciles the net income as shown on the income statement. To the actual cash the company received from or used in its operating activities.
To do this, it adjusts net income for any non-cash items. This includes adding back depreciation expenses and adjusts for any cash that was used or provided by other operating assets and liabilities.
Generally includes purchases or sales of long term assets, such as property, plant and equipment, as well as investment securities.
Typically show sources of cash flow that includes cash raised by selling stocks and bonds or borrowing from banks. Likewise, paying back a bank loan would show up as a use of cash flow.