Chapter: 8 Understanding Financial Statements

Section: 4 Cash Flow Statement

Cash Flow Statement

Cash flow data supplements the information provided by the income statement as well as linking consecutive balance sheets. The statement of cash flows is intended to report all the cash inflows and outflows (classified among operating, investing, and financing activities) of the firm for a specified period. It also provides disclosures about that period’s non cash investing and financing activities.


The classification of cash flows among operating, financing, and investing activities is essential to the analysis of cash flow data. Net cash flow (the change in cash and equivalents during the period) has little informational content by itself; it is the classification and individual components that are informative. See exhibit 3 for a sample cash flow statement.



Exhibit 3

XYZ Company

Cash Flow Statement Year Ended December 31, 2003



Saudi Riyals

Cash Flow from Operating Activities


Net Income


Add (subtract) adjustment




Deferred Taxes


Gain on the Sale of Machinery


Account Receivable




Accounts Payable




Net Cash Flow from Operations




Cash Flow from Investing Activities


Purchase Fixed Assets


Sale of old machine




Net Cash Flow from Investing




Cash Flow from Financing Activities


Increase in Long-term Loan


Sale of Common Stock


Dividend Paid


Payment of Mortgage Note




Net Cash Flow from Financing




Net Increase (Decrease) in Cash & Cash Equivalents


Cash & Cash Equivalents at Beginning of Year


Cash & Cash Equivalents at Year-End





Cash Flow from Operating Activities (cash from operations or CFO) measures the amount of cash generated or used by the firm as a result of its production and sales of goods and services. Although deficits or negative cash flows from operations are expected in some circumstances (e.g., rapid growth), for most firms positive operating cash flows are essential for long-run survival. Internally generated funds can be used to pay dividends or repurchase equity, repay loans, replace existing capacity, or invest in acquisitions and growth.


Cash Flow from Investing Activities (cash from investing or CFI) reports the amount of cash used to acquire assets such as plant and equipment as well as investments and entire businesses. These outlays are necessary to maintain a firm’s current operating capacity and to provide capacity for future growth. CFI also includes cash received from the sale or disposal of assets or segment of the business.

Cash Flow from Financing Activities (cash from financing CFF) includes cash flows related to the firm’s capital structure (debt and equity), including proceeds from the issuance of equity, returns to shareholders in the form of dividends and repurchase of equity,  and the incurrence  and repayment of debt.