What Is the Cash Flow Statement?
The cash flow statement answers the most practical question: how much cash did the company actually generate or consume during the period? It reconciles accrual-based profitability to real cash movement.
Three Sections
Cash from Operating Activities (CFO) starts with net income and adjusts for non-cash items (D&A, SBC, deferred taxes) and working capital changes. CFO reflects core business cash generation.
Cash from Investing Activities (CFI) includes capex, acquisitions, investment purchases/sales, and asset sale proceeds. Typically negative for growing companies.
Cash from Financing Activities (CFF) includes debt issuance/repayment, equity issuance/buybacks, and dividends. Shows how the company finances operations and returns capital.
Beginning cash plus the sum of all three sections equals ending cash, which matches the balance sheet.
Indirect Method
Most companies use the indirect method: start with net income, add back non-cash items, and adjust for working capital changes. This clearly shows the reconciliation between accrual income and cash flow.
Why CFO Is King
Sustainable positive CFO means the business funds itself. If net income consistently exceeds CFO, it may signal aggressive accounting or deteriorating working capital. The CFO/Net Income relationship reveals earnings quality.
FCF Approximation
CFO minus capex (from investing section) approximates free cash flow. This quick calculation is useful for screening but may not match a precise FCF calculation.
Cash Flow Statement in Banking
In financial modeling, it is the last statement built (depends on income statement and balance sheet). In LBO models, it determines annual debt paydown. In credit analysis, CFO and FCF are primary debt service metrics.