Three Sections of the Cash Flow Statement
Before we discuss the purpose of a cash flow statement, let’s first talk about what it is. The three sections of the cash flow statement are operating, investing, and financing. There are two methods to use when preparing your cash flow statement: direct and indirect.
Cash Flow Statement Summary
The cash flow statement summarizes the transactions that affected cash or cash equivalents (i.e., Accounts Receivable) in a particular period. In other words, it is a summary of all the cash payments and the cash receipts that occurred during the month, quarter, or year for business.
Each section of the cash flow statement will give insight into your business activities and where your cash came from or where it went.
The operating section of the cash flow statement will give you information on the cash generated by your sales and production activities found on the income statement.
The investing section of the cash flow statement will tell you how you are utilizing your cash in your business.
For example, if you are purchasing equipment. The financing section will tell you if you are borrowing money or if you are paying down debt. Both the activities for the investing and financing section of the cash flow statement are on the balance sheet.
It leads us to the purpose of the cash flow statement. The cash flow statement ties together all the details from the income statement and the balance sheet. It gives you a summary of the overall picture of your cash inflows and outflows for your business.
Seeing your business in this summarized format will help you understand how the transactions affect your business. When reviewing the cash flow statement, you should see how the company’s cash increased or decreased for the period.
The cash flow statement also removes any non-cash transactions that may be on the income statement, like depreciation expense for equipment. It allows us to look at how and in what areas the business is generating cash or not. Armed with this information, you will be able to make adjustments to your operations or investing or financing activities.