Preparing the Cash Flow Statement

The cash flow statement is a key financial report that tracks how cash moves into and out of a business over a set period. Unlike the income statement, which records revenues and expenses on an accrual basis, the cash flow statement focuses purely on cash, offering a clearer view of liquidity.

It is divided into operating, investing, and financing activities. Operating activities adjust net income for non-cash items like depreciation and changes in working capital, reflecting cash generated from daily operations. Investing activities show cash used for or gained from purchasing or selling long-term assets. Financing activities record cash flows related to debt, equity, and dividends.

For example, consider a small café that earns $12,000 in net income, adds back $2,000 in depreciation, and sees a $1,500 increase in inventory. Its operating cash flow would be $12,000 + $2,000 − $1,500 = $12,500. If the café buys new equipment for $3,500, this appears under investing outflows.

Understanding the cash flow statement helps businesses assess their ability to pay bills, invest in growth, and manage financial risk. Investors and lenders often examine cash flows to evaluate a company’s true financial strength beyond what income figures alone can reveal.