How to Read and Interpret Cash Flow Statement

Cash Flow Statement tell investors How they're paying for their operations and their future growth

A cash flow statement is a financial report that shows actual incoming and outgoing money the company has incurred actual cash transaction during a particular period (quarterly or yearly), in other words, Cash Flow Statement only take into account actual money moving in and out of a company but income statement also takes into account some non-cash accounting items such as depreciation.

Almost all companies use the accrual basis for accounting. In accrual basis accounting expenses are recognized when they are incurred and income is recognized only when the sale is completed.  Cash Flow Statement use cash basis accounting instead of accrual basis accounting, which means revenue is not counted until the cash is received and expenses are recognized when the cash is paid out

The cash flow statement has three session namely operating,  investing and financing session, each session record cash inflow and cash outflow under that particular activities such as received cash from sale of goods captured under cash inflow in "Operating Cash Flow" session, pay employees for their services recorded under cash outflow in "Operating Cash Flow" session.

Cash flow statement typically arranged as follows. 

 

Cash flow statement measure liquidity of a company by provides better picture to investors on ability of a company to pay off it bills, creditors, and finance growth. In fact, a company can be profitable and yet run out of money. Liquidity problem may resulted in financial difficulty of a company and potential lead into bankruptcy of a company. Cash flow statement also help investors to answer the questions, "Where did the money come from?" and "Where did it go?".

Cash flow statement is important to investor because cash flow isn't as easily manipulated as reported earnings, there is hard to manipulate company cash situation because you either don't have the cash or you have it, cash flow statement tell investors the whole story.

Investors should look at whether a company is increasing cash over previous years. A positive cash flow tell investors that the company was able to generate enough cash from operations to fund the business growth without the need for additional financing. A negative cash flow would tell investors that the company had to obtain cash from other sources such as financing from bank or sell investment or properties, fixed assets to raise cash to meet the day-to-day operations of the company.

Non cash Activities

Significant financing and investing activities that do not affect cash are not reported in the body of the statement of cash flows. Examples of significant non cash activities are: (1) Issuance of common stock to purchase assets. (2) Conversion of bonds into common stock (3) Issuance of debt to purchase assets. (4) Exchanges of plant assets.

Net cash provided (used) by operating activities

Net cash provided by operating activities also known as Total Operating Cash Flow shows the amount of cash a company raise from its regular operations. Investors should look for positive cash flow and grow steadily every quarter and year.

Net cash provided (used) by investing activities

Net cash provided by investing activities also known as Total Investing Cash Flow it's the sum of the sales of property, plant and equipment; purchases of property, plant and equipment; sale of short-term investment; purchase of short-term investment and other investing activities.

Net cash provided (used) by financing activities

Net cash provided by financing activities also known as Total Financing Cash Flow it's the sum of the issuance of stock, issuance of debt, the repayment of long-term debt, the payment of cash dividends to stockholders and other financing charges.