As the GYF recruiting team wraps up our visits to college campuses this fall, we are taking the time to reflect on some of the fundamentals learned in our introductory accounting classes. Though basic, these concepts are important to understand because the financial statements provide key information about an organization. This series of posts focuses on three core financial statements: the Income Statement, the Statement of Cash Flows and the Balance Sheet.
About the Statement of Cash Flows
The Statement of Cash Flows is exactly as it sounds – a document that provides a detailed report of the flow of cash in and out of the business. These cash flows are tracked over a specific period of time (typically monthly, quarterly or annually) and categorized into three key activities as detailed below.
Operating Activities
This section shows whether a company’s core business (selling products and services) produces a profit. Cash flows in this section track the amounts generated (or used) in the day-to-day operations of the business, which typically consists of:
- Cash received from customers
- Cash paid to vendors and employees
Investing Activities
These activities reflect how a company is growing and reinvesting. Negative cash flow in this section is not always bad; it could indicate that business is investing in future growth. Cash flows here include amounts used for (or generated by) the acquisition and disposal of long-term assets, such as:
- Buying or selling equipment
- Trading (purchase or sale) investments
- Acquiring other businesses
Financing Activities
Financing shows how company funds its operations and how it manages shareholder value. This section includes cash flows related to debt, equity, retained earnings, and issuing or buying back shares. Examples include:
- Loan proceeds or repayments
- Issuing stock or paying dividends
- Treasury stock purchases
Why the Statement of Cash Flows Is Important
The Statement of Cash Flows is a powerful tool for understanding not only whether a company is making money, but also if has the cash it needs for ongoing operations and growth. The information it provides about the actual movement of cash in and out of the business reveals a company’s liquidity, or its ability to meet day-to-day financial obligations. A company can appear profitable on paper, but if it does not have sufficient cash on hand to pay bills, suppliers, or employees, it could still be at serious risk.
The Statement of Cash Flows is also important because it shows the financial health of a business. Specifically, the section on operating activities tells whether a company is generating cash from its core operations. It also provides a view of the company’s investing and financing activities, offering insight into how it is using or raising money. Knowing whether the funds are used to purchase equipment, take on debt, or pay dividends is critical for understanding a company’s strategy and financial stability.
Finally, the Statement of Cash Flows complements the Income Statement to clarify the financial health of the company for stakeholders. Profits do not always reflect cash in the bank. The Statement of Cash Flows adjusts net income for non-cash items like depreciation and changes in working capital. Investors use it to assess financial risk, lenders use it to evaluate repayment ability, and business owners or managers rely on it for forecasting, budgeting, and making informed decisions.
To learn more about accounting or to review our current opportunities for students and experienced professionals, please visit GYF’s Careers website page.
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