From the course: Accounting Foundations

Overview of the cash flow statement

From the course: Accounting Foundations

Start my 1-month free trial

Overview of the cash flow statement

“

- The statement of cash flows is the baby of the financial statements. The balance sheet, and the income statement, they've been around for over 500 years. In contrast, the statement of cash flows first started appearing in just 1988, so it's brand new in an accounting sense. Now, as we talk about the statement of cash flows, you're going to wonder why accountants didn't invent it sooner. I asked myself the same question. The idea behind the statement of cash flows is so simple. The statement of cash flows is a report of the amount of cash collected and the amount of cash paid by a company during a period: a month, a quarter, or a year. That's a pretty easy concept. We're just focusing on cash. How much cash did you collect? How much did you pay? Now, the structure of the statement of cash flows is to separate the cash flows into three categories: Operating activities, investing activities, and financing activities. Let me tell you what those three activities are. Operating activities are the things that you do every single day, your operations. When would you collect cash from operating activities? Well, Walmart collects cash from its operating activities when it collects cash from selling items to you and me. A consulting company collects cash by providing consulting services to you and me and then collecting cash from us. Those are cash inflows from operating activities. Examples of cash outflows from operating activities are cash paid for wages, for utilities, for taxes, for interest. Operating activities are the things that a company does routinely every single day. The next category of cash flows is investing activities. Now, here the word investing means investing in the productive capacity of the business, so cash outflows from investing activities are buying new buildings, buying new land, buying new machines. How often do I do investing activities? Well, occasionally, but not every day. These are not routine things. I don't go out and buy a building for a business every single day. Now, the third category of cash flows is financing activities. Financing activities are just what they sound like. I'm getting the cash to pay for the necessary things in my business. I'm borrowing some money. I'm getting new investments from owners. Those are cash inflows from financing activities. Cash outflows from financing activities? Well, I'm repaying those loans. I'm paying dividends to my owners. Those are cash outflows from financing activities. Now, how often do I do financing activities? Well, occasionally, but not very often. Operating activities, those are the things that I do every single day, repetitively, over and over. I'm in business to conduct operations. That's what my business exists for. Investing activities are expanding the productive capacity of my business. Financing activities are getting the cash to do what I need to do. I'm borrowing money and I'm paying it back. I'm getting cash from shareholders and I'm paying dividends to them. Cash from operating activities, cash from investing activities, and cash from financing activities. That's the statement of cash flows. It's only been around for 37 years, but it's been an awesome 37 years.

Contents