The cash flow statement is a financial statement which presents the company’s cash receipts and disbursements over a stated period. The net cash flow corresponds to the change in the cash balance on the balance sheet over the period.
The cash flow statement has three sections: cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.
Cash flow from operating activities are those cash flows associated with the firm’s operating transactions, such as cash received from customers and cash payments made to vendors and employees. Cash flow from operations represents a firm’s most sustainable source of cash flow. A firm which cannot reliably generate cash flow from operations will likely not survive as a business.
Cash flow from investing activities are those cash flows associated with the purchase or sale of long-term assets, financial securities, or controlling interests in businesses.
Cash flow from financing activities are those cash flows arising from the firm’s transactions with debt and equity holders.
The cash flow statement may be prepared on a direct or indirect basis. The difference between the two methods lies in the presentation of the operating cash flow section. With the direct method, operating cash flow is calculated directly based on operating sources and uses of cash flow . With the indirect method, operating cash flow is calculated by adjusting net income for the accruals which occur over the period.
This concept is a core part of fundamental investing.