Cash Flow Statement​

A reconciliation of the cash generated

What is the Cash Flow Statement?

A Cash Flow Statement (also called the Statement of Cash flows) shows how much cash is generated and used during a given time period. It is one of the main financial statements analysts use in building a three statement model. The main categories found in a cash flow statement are the operating activities, investing activities and financing activities of a company and are organized respectively as mentioned.  The total cash provided from or used by each of the three activities will be combined with the opening cash balance of the year to calculate the cash flow statement’s bottom line amount or the closing cash balance.

One of the primary reasons cash inflows and outflows are observed is to compare the cash from operations to net income to gauge how well a company is running its operations. The cash flow statement better reflects the amount the company receives from its profits. This is because the income statement is prepared under the accrual basis of accounting, where it matches revenues and expenses, even though revenues may actually not have been collected and expenses may not have been paid.


cash flow statement example


How to set up the Cash Flow Statement?


#1 Operating Cash flow

The cash flow statement is commonly presented using the indirect method. It starts with net income or loss, followed by addition to or subtractions from that amount to adjust a net income to a cash basis. What is added or subtracted are changes in the account balances of items found in current assets and current liabilities, as well as non-cash accounts.  We then arrive at the cash version of a company’s net income.

Net Earnings

This amount is the bottom line of an income statement. Net income or earnings shows the profitability of a company over a period of time. It is calculated by taking the revenues and subtracting from it COGS and total expenses, which includes SG&A, Depreciation and Amortization, interest, etc.

Plus: Depreciation and Amortization (D&A)

The value of various assets declines over time when used in a business. As a result, D&A are expenses that allocate the cost of an asset over its useful life. Depreciation involves tangible assets such as buildings, machinery, and equipment, whereas amortization involves intangible assets such as patents, copyrights, goodwill, and software. D&A reduces net income in the income statement. However, we add this back in the cash flow statement to adjust net income, because these are non-cash expenses. In other words, no cash was involved.

Less: Changes in working capital

Working capital represents the difference between a company’s current assets and current liabilities. Any changes in current assets (other than cash) and current liabilities affect the cash balance in operating activities.

For instance, when a company buys more inventory, current assets increase. This positive change in inventory is subtracted from net income, because it is seen as a cash outflow.  It’s the same case for accounts receivable. When it increases, it means the company sold their goods on credit. There was no cash transaction, so accounts receivable is also subtracted from net income.

On the other hand, if a current liability item such as accounts payable increases, this is considered a cash inflow, because the company has more cash to keep in its business. This is then added to the net income.

Cash from operations

When all the adjustments have been made, we arrive at the net cash provided by the company’s operating activities. This is not a replacement of net income but a summary of how much cash is generated from the core business.


#2 Investing Cash Flow

This category is also called investing activities and reports the changes in capital expenditures (capex) and long-term investments. Capex can be referred to as the purchase of property, plant or equipment. Long-term investments can be debt and equity instruments of other companies. Another important item found here are acquisitions of other businesses. A key to remember is that a change in the long-term assets in the balance sheet is reported in the investing activities of the cash flow statement.

Investments in Property and Equipment

In our example, these investments could mean purchases of new office equipment such as computers and printers for a growing number of employees and a purchase of a new land and a building to house the business operations and logistics of a company. These items are necessary to keep the company running. These investments are a cash outflow, and therefore will have a negative sign when we calculate the net increase in cash for all activities.

Cash from investing

This is the total amount of cash provided by (used in) investing activities. In our example, we have a net outflow for each and every year.


#3 Financing Cash Flow

This category is also called financing activities and reports any issuance or repurchases of stocks and bonds of a company, as well as the dividend payments it makes.  The changes in long-term liabilities and stockholders’ equity in the balance sheet are reported in financing activities.

Issuance (repayment) of debt

A company will issue debt as a way to finance its operations. The more cash it has the better, as it will be able to expand rapidly. Unlike equity, issuing debt doesn’t grant any ownership in the company, so it doesn’t dilute the ownership of existing shareholders.  The issuance of debt is a cash inflow, because a company finds investors willing to act as lenders. However, when these investors are paid back, then a debt repayment is a cash outflow.

Issuance (repayment) of equity

This is another way of financing a company’s operations. Unlike debt, equity holders will have some ownership stake in the business in exchange for money given to the company for use. Future earnings must be shared with these equity holders or investors. Issuance of equity is an additional source of cash, so it’s a cash inflow. Conversely, an equity repayment is a cash outflow. This is buying back, through cash payment, the equity from its investors, and thereby increasing the stake held by existing equity holders.

Cash from financing

This is also called the net cash provided by (used in) financing activities. The cash from financing is calculated by summing up all the cash inflows and outflows related to changes in long-term liabilities and shareholder’s equity accounts.


#4 Cash Balance

Net Increase (decrease) in Cash

Once we have all net cash balances for each of the three sections of the cash flow statement, we sum them all up to find the net cash increase or decrease for the given time period. We then take this amount and add it to the opening cash balance to eventually arrive at the closing cash balance.

Opening cash balance

The opening cash balance is last year’s closing cash balance. We can find this amount from last year’s cash flow statement and balance sheet statement.

Closing cash balance

The closing cash balance is taken by adding together net increase or decrease in cash and opening cash balance. This amount will be reported in the balance sheet statement under the current asset section.


How to build the Cash Flow Statement into a financial model?

A cash flow statement model in Excel displays the historical and projected data. Before this is created, we first need to have the income statement and balance sheet statement models built in Excel, since their data will be integrated with the cash flow statement model.


cash flow statement in a financial model


As we have seen from our financial model example, it shows all the historical data in blue font, while the forecasted data in black font.  The figure below just serves as a general guideline as to where to find historical data to hardcode for the line items. Additionally, it shows where we find, in the financial model, the calculated or references data to fill up the forecast period section. When all three statements are built in excel, we now have what we call a “three statement model”.


comparing the financial statement


Move forward!