Let’s take a closer look at what cash flow statements do for your business, and why they’re so important. Then, we’ll walk through an example cash flow statement, and show you how to create your own using a template. Conversely, if a current liability, like accounts payable, increases this is considered a cash inflow. This is because the company has yet to pay cash for something it purchased on credit.

Most companies report using the indirect method, although some will use the direct method (see CVS’s 2022 annual report here). Changes made in cash, accounts receivable, depreciation, inventory, and accounts payable are generally reflected in cash from operations. A cash flow statement tracks the inflow and outflow of cash, providing insights into a company’s financial health and operational efficiency. KPMG professionals discuss how a range of recent issues are dealt with in the statement of cash flows.

How to read a cash flow statement

The operating activities on the CFS include any sources and uses of cash from business activities. In other words, it reflects how much cash is generated from a company’s products or services. It covers all the cash sources starting from banks or investors, to cash used to pay shareholders. Similarly, a settlement for stock repurchased, payment of interests, and the compensation of debt are recorded in this category. In cash financing when funds are raised, it is known as “cash in” and when dividends are given it is known as “cash-out”. This Handbook provides an in-depth look at statement of cash flows classification issues and noncash disclosure requirements.

The information that you get from the cash flow statement is beneficial for the management to take informed decisions for regulating business operations. A cash flow statement tells you how much cash is entering and leaving your business in a given period. Along with balance sheets and income statements, it’s one of the three most important financial statements for managing your small business accounting and making sure you have enough cash to keep operating. We sum up the three sections of the cash flow statement to find the net cash increase or decrease for the given time period.

Cash Flow Statement – Definition and Importance

This method of CFS is easier for very small businesses that use the cash basis accounting method. The Meaning of what is cash flow or statement of cash flows can be defined as ‘cash flow statements exhibit the flow of incoming and outgoing cash. This statement assesses the ability of the enterprise to generate cash and to utilize the cash.

• You can think of financing activities as the ways a company finances its operations either through long-term debt or equity financing.
• The cash flow statement is reported in a straightforward manner, using cash payments and receipts.
• The indirect method also makes adjustments to add back non-operating activities that do not affect a company’s operating cash flow.
• The term cash flow generally refers to a company’s ability to collect and maintain adequate amounts of cash to pay its upcoming bills.

Without the full context, you may not completely understand how the company is doing. Many companies have such large businesses that they show numbers on their cash flow statement in thousands or in millions—if they do, there will be a note at the top of the statement explaining this. The change in net cash for the period is equal to the sum of cash flows from operating, investing, and financing activities.