Structure
The Cash Flow Statement (CFS), using the common indirect method, reconciles Net Income to the actual change in cash by organizing cash inflows and outflows into three distinct activities.
1. Cash from Operations (CFO)
- Starting Point: Net Income (from the Income Statement).
- Adjustments:
- Add back non-cash expenses (e.g., Depreciation & Amortization (D&A), Stock-Based Compensation).
- Adjust for changes in Net Working Capital (NWC) accounts (e.g., Accounts Receivable, Inventory, Accounts Payable).
- Represents: Cash generated or consumed by the company’s normal business operations.
2. Cash from Investing (CFI)
- Includes:
- Capital Expenditures (Capex) (Purchases of Property, Plant & Equipment (PP&E)) - typically the largest outflow.
- Cash used for business acquisitions or received from divestitures (selling assets/businesses).
- Represents: Cash flows related to the purchase and sale of long-term assets and investments.
3. Cash from Financing (CFF)
- Includes:
- Cash received from issuing Debt or Equity.
- Cash used for repayment of Debt or Share Repurchases.
- Cash paid out as Dividends.
- Represents: Cash flows between the company and its owners/creditors.
Outcome
- Sum of CFO, CFI, and CFF = Net Change in Cash for the period.
- Beginning Cash + Net Change in Cash = Ending Cash Balance (which links to the Balance Sheet).
See also: Financial Statements, Balance Sheet, Income Statement