Cash flow statement

Analyzing Financial Statements in Python

Rohan Chatterjee

Risk Modeler

Show me the money!

Accrual method of accounting

Transaction recorded in income statement when it takes place, not when cash is exchanged

Cash flow statement

Tells us business' cash and cash equivalents in a (financial) period
Records transactions when cash is exchanged
Entries in cash flow statement are linked to entries of the income statement and balance sheet
However, it is still a distinct financial statement

Types of cash flow statement

Two ways of preparing a cash flow statement

Indirect method: Based on the accrual method of accounting - accountant starts with net income (or loss) and adjusts up or down depending on transactions done in cash
Direct method: Recording cash transactions when they take place

Since most businesses follow accrual-based accounting, we will focus on the indirect method.

Structure of cash flow statement

The cash flow statement is usually broken down into three parts:

Cash from operating activities
Cash from investing activities
Cash from financing activities

Cash from operating activities

Focuses on cash flows in the core business
Accounts receivable
- Customers to pay at a later date
- Increase in accounts receivable is a cash outflow because more customers bought products on credit
Accounts payable
- Increase in accounts payable is a cash inflow

Image showing the cash flow from operating activities. Shows increase in accounts payable as a cash outflow and accounts payable as a cash inflow.

Cash flow from investing activities

Focuses on cash generated (or lost) from investing activities of the company
Investments that pay cash will be a cash inflow
Purchase of property, plant, and equipment (with cash) is a cash outflow

Shows the cash flows from investing activities. Cash generated from investments is a cash inflow and cash spent to purchases property, plant and equipment is a cash outflow.

Cash flow from financing activities

Focuses on cash generated (or lost) from financing activities of the company
Dividends paid in cash to the investors of the company is a cash outflow

This image shows cash flow from financing activities. Cash paid out as dividends is a cash outflow.

Cash flow statement all together

This image puts different sections of the cash flow statement together. It has the cash flow from operating, investing and financing activities. The items under each of these sections are the same as when these sections are discussed in detail before.

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Analyzing Financial Statements in Python