Walk me through a cash flow statement?

The cash flow statement is a three-tier structure consisting of:

1. Cash flow from operations

2. Cash flow from Investing and

3. Cash flow from Financing

Cash flow from operations (CFO)

Cash flow from operations start from the net income of the company and deducts all noncash income and adds back non-cash expenses.

Some of the non-cash expenses added back to CFO includes - Depreciation: Recall that depreciation expenses are non-cash expenses on the income statement which aims to capture the component of fixed asset which was used in that year.

Change in working capital: Working capital is current assets less current liabilities. We will discuss this in more detail later.

Increase or decrease in deferred taxes: Remember deferred tax assets or liabilities are created due to the difference in the actual tax paid and the tax calculated on the company’s income statement.

Any increase in assets is seen as use of cash which means cash will reduce by that amount. Any increase in liabilities is a source of cash – meaning the cash balance will go up by that amount. So, in the above entry of deferred tax assets and liabilities – when deferred tax assets go up cash will go down and when liabilities go up cash goes up.

Cash flow from investing activities (CFI)

Cash flow from investing activities include items relating to the investing activities of a company both operating and non-operating.

1. Capex: i.e. Investment in PP&E

2. Acquisitions: Assets acquired through the acquisition of other companies

3. Disposals: Sale of fixed assets

4. Investments: These are securities and debt instruments invested in by the company

5. Sale of investments securities

6. Others.

Cash flow from financing (CFF)

CFF include the company’s equity and debt financing used to fund its operations

• Debt issuance: The cash inflow resulting from the issuance of any debt

• Debt repayment: This is the cash outflow driven by the re-payment of debt

• Dividends: Any dividends paid by the company is recorded as cash outflow

• Common Stock Issued: Cash inflow resulting from the issuance of any new equity

Common Stock repurchased: Cash outflow driven by the share repurchases.


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