Value Investing: Cash Flow Statements Beginners Guide

What is a cash flow statement?

A cash-flow statement shows where cash comes from and where cash goes. It gives insight into a business’ different activities such as normal operations, buying and selling assets, and borrowing or repaying loans.

Cash flow statement example:

Business Name
Cash Flow Statement
For Year Ended 30th June, 20XX

Cash flows from operations

Net Sales
Sales Salaries (50,000)
Advertising Expenses (10,000)
Office Salaries (50,000)
Interest Expenses (10,000)
Income Tax (24,000)

Net Cash Provided By Operations

Cash flows from investing activities

Purchase of property and equipment (120,000)
Sale of property and equipment        20,000

Net cash provided by investing activities (100,000)

Cash flows from financing activities

Loan drawdowns      100,000
Loan repayments (20,000)

Net cash provided from financing activities        80,000

Net increase (decrease) in cash

Cash balance last period
Cash balance this period

Understanding A Cash Flow Statement

Cash flow from operations

Cash flow from operations shows the cash flow from regular business operations. The net profit figure from the P&L statement is brought in. However the Net Profit figure is adjusted to reflect actual cash flow not accrual flows.

Cash flow from operations can include items like:

  • Cash income from regular activities
  • Interest payments on loans
  • Cash payments from regular activities
  • Taxes

These items are not written individually in the cash flow from operations area but are accounted for by including the ‘Net Profit or Loss’ figure from the P&L statement. A good rule to follow when determining cash flow from operations is that it is the cash effects of transactions in the P&L statement.

E.g. if the P&L statement shows that there were large depreciation expenses you should make an adjustment in the cash flow statement because depreciation expenses are not actual cash expenses, they do not affect actual cash flow.

Think about how you would need to adjust for the cash effects. If depreciation reduced net income in the P&L statement because it is an expense then in the cash flows from operating activities area you will need to add it back.

Cash Flow from Investing activities

As the name suggests, cash flow from investing shows the cash flows from investing activities. Investing activities are those that aren’t considered normal operations and include:

  • Cash spent on buying or selling long-term assets
  • Cash from borrowing or repaying a loan

Cash Flow from financing

Cash flow from financing measure the flow of cash between the company and its creditors. Creditors are people that the company has borrowed money from. These might be a bank,  share-holders, bond holders etc.

  • Issuing shares
  • Issuing debt
  • Paying dividends out
  • Buying back shares
  • Buying back bonds

Interpreting a cash flow statement

Cash flow statements are very powerful sources of information about a company. read our How To Interpret A Cash Flow Statement for more.

Direct Vs. Indirect Method

Well if you weren’t confused enough there are two different ways that accountants can prepare cash flow statements; the direct method and the indirect method. We have used the direct method in our example. You can read our Cash Flow Statements: Direct Method Vs. Indirect Method guide for an explanation of the differences.