Reading a Cash-flow Statement

While the balance sheet is a static snapshot of the company's financial position at a specified frozen time frame (usually the last day of the accounting period), the cash flow statement is the dynamic picture of the inflow and outflow over a period of time.

The cash flow statement only includes those transactions that match revenues with expenses associated with generating those revenues in cash equivalents. All non-cash transactions such as depreciation and write off do not form a part of the cash flow statement.  So the cash flow statement only focuses on operating activities, investment activities and financing activities.

As a homemaker who has invested in securities such as stocks for the financial security of your family, you need to appreciate the cash flow statement of the company whose stocks you hold.  This statement can provide you with information on the liquidity and solvency of the company and its ability to survive crisis.  It will also provide you insights into the changing value of assets and liabilities of the company and its net worth. It can form the basis for comparing the performance of a particular company with its competitors and thereby provide you with valuable  information for wise investment. It will also provide you with a strong basis for evaluating the future growth of the company and the growth potential of your investment.

The different parts of the cash flow statement are:

Operating activities

All production, sales and delivery costs will be included under operating activities of the company.  These could be:

• receipts from the sale of goods or services
• receipts for the sale of loans, debt or equity instruments in a trading portfolio
• interest received on loans
• dividends received on equity securities
• payments to suppliers for goods and services
• payments to employees or on behalf of employees
• tax payments
• interest payments
• payments for the sale of loans, debt or equity instruments in a trading portfolio

Operation activities which are not included in the cash flow statement would be depreciation, deferred tax and amortization expenses. Any gain or loss from sale of assets will also not form part of the cash flow statement.

Investing activities

When cash from the company is invested in long term assets for the use of the company for production of goods and services, such cash will be recorded as cash outflows.  These would include:

• capital expenditures in land and building, plant and equipment
• Investments in negotiable instruments in banks and other financial institutions
• collections on loan principal and sales of other firms' debt instruments
• investment returns from other firms' equity instruments, including sale of those instruments
• receipts from sale of plant and equipment
• expenditure for purchase of plant and equipment
• loans made and acquisition of other firms' debt instruments
• expenditure for purchase of other firms' equity instruments (unless held for trading or considered cash equivalents)

Financing activities

Cash inflow from investors, banks and shareholders and outflow to shareholders in form of dividends and any activities that impact the long term liabilities and equities of the company are included in the cash flow statement under this head. The items that form part of this section of the cash flow statement include:

• proceeds from issuing shares
• proceeds from issuing short-term or long-term debt
• payments of dividends
• payments for repurchase of company shares
• repayment of debt principal, including capital leases
• for non-profit organizations, receipts of donor-restricted cash that is limited to long-term purposes