In accounting, the balance sheet is a snapshot on a company’s finances at a fixed time; accordingly, the cash flow statement reflects the changes in company’s finance over a considerably longer time. The statement reflects both the cash inflow and the cash outflow for a specific period of time. The cash flow statement basically shows how profitable the company is over a period of time (months or years), so this is a document investors carefully analyze when making decisions.
The cash flow statement has three components:
– cash flow from operating activities
– cash flow from financing activities
– cash flow from investing activities
When analyzing cash flow, two points in time are taken into consideration: the cash items at the beginning and at the end of the period, in accordance to the company’s balance sheet for the respective times. As I said before, both the cash inflows and outflows are considered.
1. The cash flow from operating activities. Composed of actions related to the sale of products or services, it records expenses for raw materials acquisition, marketing expenses, sale expenses, tax payments and more…
2. The cash flow from financing activities is composed of debentures, shares, notes, payments of dividends, interest on debts and loans (either long term or short term debts).
3. The cash flow from investing activities usually reflects the change in company’s net fixed assets. It deals with actions such as: the sale of financial or real assets, repayments for long-term loans, investments in equipment or assets acquisition.
Regarding financial expenses, there are differences between the classification of cash flows for internal company’s analysis and that required by GAAP. In company’s statement, the financial expenses are included under cash flows for financing activities whilst GAAP considers these expenses from operating activities.
Here is an example of cash flow statement for your reference: