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The Statement of Cash Flows


This is the third and last financial statement we’ll be talking about in our Tax Tip Tuesday posts (if you missed the previous two, they were posted on July 27 and August 10.)

The cash flow statement summarizes the amount of cash and cash equivalents coming in and out of a company.

This statement will tell you how well a company manages its cash. In other words, how well the company generates cash to pay its debt obligations and fund its operating expenses.


The main components of a cash flow statement are:

  1. Cash from operating activities: How much cash is generated from a company's business activities.

  2. Cash from investing activities: Any sources and uses of cash from a company's investments.

  3. Cash from financing activities: The sources of cash from investors or banks, as well as the uses of cash paid to shareholders.

  4. Disclosure of noncash activities is sometimes included when prepared under the generally accepted accounting principles (GAAP).

Sometimes, companies may show a negative cash flow statement. This should not automatically raise a red flag without further analysis. A negative cash flow could be the result of a company's decision to expand its business at a certain point in time, which would be a good thing for the future. This is why analyzing changes in cash flow from one period to the next gives the investor a better idea of how the company is performing. Also, as we have mentioned before, it is very important to complement this information with the balance sheet and the income statement.

This post may not contain a complete analysis of the tax issues discussed herein and does not represent official conclusions or advice regarding the matter.



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