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How to Prepare a Cash Flow Statement

• 07 Dec 2021

Cash flow statements are one of the three fundamental financial statements financial leaders use. Along with income statements and balance sheets, cash flow statements provide crucial financial data that informs organizational decision-making. While all three are important to assessing a company’s finances, some business leaders might argue that cash flow statements are the most important.

Business owners, managers, and company stakeholders use cash flow statements to better understand their companies’ value and overall health and guide financial decision-making. Regardless of your position, learning how to create and interpret financial statements can empower you to understand your company’s inner workings and contribute to its future success.

Related: The Beginner's Guide to Reading & Understanding Financial Statements

Here’s a look at what a cash flow statement is and how to create one.

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What Is a Cash Flow Statement?

A cash flow statement is a financial report that details how cash entered and left a business during a reporting period.

According to the online course Financial Accounting : “The purpose of the statement of cash flows is to provide a more detailed picture of what happened to a business’s cash during an accounting period.”

Related: How to Read & Understand a Cash Flow Statement

Since cash flow statements provide insight into different areas a business used or received cash during a specific period, they’re important financial statements for valuing a company and understanding how it operates.

A typical cash flow statement comprises three sections: cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.

If you’re wondering how to make a cash flow statement, these steps can guide you through the process, from gathering initial data to calculating the final cash balance.

How to Create a Cash Flow Statement

1. Determine the Starting Balance

The first step in preparing a cash flow statement is determining the starting balance of cash and cash equivalents at the beginning of the reporting period. This value can be found on the income statement of the same accounting period.

The starting cash balance is necessary when leveraging the indirect method of calculating cash flow from operating activities. However, the direct method doesn’t require this information.

2. Calculate Cash Flow from Operating Activities

Once you have your starting balance, you need to calculate cash flow from operating activities. This step is crucial because it reveals how much cash a company generated from its operations.

Cash flow from operations are calculated using either the direct or indirect method.

Direct Method

The direct method of calculating cash flow from operating activities is a straightforward process that involves taking all the cash collections from operations and subtracting all the cash disbursements from operations. This approach lists all the transactions that resulted in cash paid or received during the reporting period.

Indirect Method

The indirect method of calculating cash flow from operating activities requires you to start with net income from the income statement (see step one above) and make adjustments to “undo” the impact of the accruals made during the reporting period. Some of the most common and consistent adjustments include depreciation and amortization.

Related: Financial Terminology: 20 Financial Terms to Know

The direct and indirect methods will result in the same number, but the process of calculating cash flow from operations differs.

While the direct method is easier to understand, it’s more time-consuming because it requires accounting for every transaction that took place during the reporting period. Most companies prefer the indirect method because it's faster and closely linked to the balance sheet. However, both methods are accepted by Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

Related: GAAP vs. IFRS: What Are the Key Differences and Which Should You Use?

3. Calculate Cash Flow from Investing Activities

After calculating cash flows from operating activities, you need to calculate cash flows from investing activities. This section of the cash flow statement details cash flows related to the buying and selling of long-term assets like property, facilities, and equipment. Keep in mind that this section only includes investing activities involving free cash, not debt.

4. Calculate Cash Flow from Financing Activity

The third section of the cash flow statement examines cash inflows and outflows related to financing activities. This includes cash flows from both debt and equity financing—cash flows associated with raising cash and paying back debts to investors and creditors.

When using GAAP, this section also includes dividends paid, which may be included in the operating section when using IFRS standards. Interest paid is included in the operating section under GAAP but sometimes in the financing section under IFRS.

5. Determine the Ending Balance

Once cash flows generated from the three main types of business activities are accounted for, you can determine the ending balance of cash and cash equivalents at the close of the reporting period.

The change in net cash for the period is equal to the sum of cash flows from operating, investing, and financing activities. This value shows the total amount of cash a company gained or lost during the reporting period. A positive net cash flow indicates a company had more cash flowing into it than out of it, while a negative net cash flow indicates it spent more than it earned.

Cash Flow Statement Example

Understanding cash flow statements can help you manage your business's finances by revealing not just the amounts but also the sources and uses of cash. To help visualize each section of the cash flow statement, here’s a cash flow statement example of a fictional company generated using the indirect method.

Go to the alternative version .

This cash flow statement is for a reporting period that ended on Sept. 28, 2019. As you'll notice at the top of the statement, the opening balance of cash and cash equivalents was approximately $10.7 billion.

During the reporting period, operating activities generated a total of $53.7 billion. The investing activities section shows that the business used a total of $33.8 billion in transactions related to investments. The financing activities section shows that a total of $16.3 billion was spent on activities related to debt and equity financing.

At the bottom of the cash flow statement, the three sections are summed to total a $3.5 billion increase in cash and cash equivalents over the course of the reporting period. Therefore, the final balance of cash and cash equivalents at the end of the year equals $14.3 billion.

The Difference Between a Balance Sheet and a Cash Flow Statement

The balance sheet and cash flow statement are fundamental tools in financial analysis. However, these documents serve distinct purposes and offer different insights into your organization's financial health .

A balance sheet provides a snapshot of a company's financial position at a specific point in time, detailing assets, liabilities, and shareholders' equity. As a result, it offers an overview of what a company owns and owes. In contrast, a cash flow statement focuses specifically on the movement of cash within an organization over a reporting period, categorizing cash activities into operating, investing, and financing activities.

Therefore, the cash flow statement is crucial for understanding the liquidity and operational efficiency of the business, which is vital for day-to-day operations and strategic planning .

How to Enhance Decision-Making with Financial Statements

Understanding how to create, interpret, and effectively use financial statements is pivotal for strategic decision-making. Financial statements, particularly, are essential tools that extend beyond simple record-keeping that can guide your business strategy .

The cash flow statement is crucial because it delves into how a company manages its cash—detailing how cash is generated from everyday operations, how it’s reinvested back into the business, and how it’s allocated in financing efforts. These insights are indispensable for evaluating a company’s liquidity and financial agility.

Understanding the cash flow statement is key to answering vital business questions, such as:

• Is the company generating enough cash from its core operations to sustain itself?
• Are the capital investments proportionate to the available cash?
• Is the financial strategy effective over the long term?

By learning how to create and analyze cash flow statements, you can make better, more informed decisions, regardless of your position.

Are you interested in gaining a toolkit for making smarter financial decisions and the confidence to clearly communicate them to key stakeholders? Explore Financial Accounting —one of three courses comprising our Credential of Readiness (CORe) program —to discover how you can unlock critical insights into your organization’s performance and potential. Not sure which course is right for you? Download our free business essentials flowchart .

This post was updated on June 13, 2024. It was originally published on December 7, 2021.

Data Tables

Company a - statement of cash flows (alternative version).

Year Ended September 28, 2019 (In millions)

Cash and cash equivalents, beginning of the year: $10,746

OPERATING ACTIVITIES

Investing activities, financing activities.

Increase / Decrease in Cash and Cash Equivalents: 3,513

Cash and Cash Equivalents, End of Year: $14,259

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What Is a Cash Flow Statement (CFS)?

• Using the Cash Flow Statement

How to Prepare a Cash Flow Statement

What is the cash flow formula.

• Limitations
• Income Statement & Balance Sheet

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• Corporate Finance
• Financial statements: Balance, income, cash flow, and equity

Cash Flow Statement: What It Is and How to Read One

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

Suzanne is a content marketer, writer, and fact-checker. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies.

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A cash flow statement tracks the inflow and outflow of cash, providing insights into a company's financial health and operational efficiency.

The CFS measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses. As one of the three main financial statements, the CFS complements the balance sheet and the income statement. In this article, we’ll show you how the CFS is structured and how you can use it when analyzing a company.

Key Takeaways

• A cash flow statement summarizes the amount of cash and cash equivalents entering and leaving a company. 
• The CFS highlights a company's cash management, including how well it generates cash. 
• This financial statement complements the balance sheet and the income statement. 
• The main components of the CFS are cash from three areas: Operating activities, investing activities, and financing activities.
• The two methods of calculating cash flow are the direct method and the indirect method.

How the Cash Flow Statement Is Used

The cash flow statement paints a picture as to how a company’s operations are running, where its money comes from, and how money is being spent. Also known as the statement of cash flows, the CFS helps its creditors determine how much cash is available (referred to as  liquidity ) for the company to fund its operating expenses and pay down its debts. The CFS is equally important to investors because it tells them whether a company is on solid financial ground. As such, they can use the statement to make better, more informed decisions about their investments.

Structure of the Cash Flow Statement

The main components of the cash flow statement are:

• Cash flow from operating activities
• Cash flow from investing activities
• Cash flow from financing activities
• Disclosure of non-cash activities, which is sometimes included when prepared under generally accepted accounting principles (GAAP) .

Cash From Operating Activities

The operating activities on the CFS include any sources and uses of cash from business activities. In other words, it reflects how much cash is generated from a company’s products or services.

These operating activities might include:

• Receipts from sales of goods and services
• Interest payments
• Income tax payments
• Payments made to suppliers of goods and services used in production
• Salary and wage payments to employees
• Rent payments
• Any other type of operating expenses

In the case of a trading portfolio or an investment company, receipts from the sale of loans, debt, or equity instruments are also included because it is a business activity.

Changes made in cash, accounts receivable, depreciation, inventory, and accounts payable are generally reflected in cash from operations.

Cash From Investing Activities

Investing activities include any sources and uses of cash from a company’s investments. Purchases or sales of assets, loans made to vendors or received from customers, or any payments related to mergers and acquisitions (M&A) are included in this category. In short, changes in equipment, assets, or investments relate to cash from investing.

Changes in cash from investing are usually considered cash-out items because cash is used to buy new equipment, buildings, or short-term assets such as marketable securities. But when a company divests an asset, the transaction is considered cash-in for calculating cash from investing.

Cash From Financing Activities

Cash from financing activities includes the sources of cash from investors and banks, as well as the way cash is paid to shareholders. This includes any dividends, payments for stock repurchases , and repayment of debt principal (loans) that are made by the company.

Changes in cash from financing are cash-in when capital is raised and cash-out when dividends are paid. Thus, if a company issues a bond to the public, the company receives cash financing. However, when interest is paid to bondholders , the company is reducing its cash. And remember, although interest is a cash-out expense, it is reported as an operating activity—not a financing activity.

1 . Gather Financial Statements

Before you begin, collect the necessary financial statements:

• Income statement: Provides information on revenues, expenses, and net income.
• Balance sheet: Shows the company’s assets, liabilities, and equity at the beginning and end of the period.

2. Determine the Reporting Period

Identify the period for which you are preparing the cash flow statement. This could be monthly, quarterly, or annually.

3. Choose the Method

Decide whether you will use the direct method or the indirect method to prepare the CFS.

• Direct Method: The direct method involves listing all cash receipts and payments during the reporting period.
• Indirect Method: The indirect method starts with net income and adjusts for changes in non-cash transactions.

4. Prepare the Statement

Cash flow from operating activities.

Direct Method:

• List cash receipts: Include cash collected from customers.
• List cash payments: Include cash paid to suppliers, employees, interest paid, and income taxes paid.
• Calculate net cash flow from operating activities: Subtract total cash payments from total cash receipts.

Indirect Method:

• Start with net income: Obtain this from the income statement.
• Adjust for non-cash items: Add back depreciation and amortization.
• Adjust for changes in working capital: Account for changes in accounts receivable, inventory, accounts payable, and other working capital accounts.
• Calculate net cash flow from operating activities: Combine the adjusted net income with changes in working capital.

Cash Flow from Investing Activities

• Identify cash transactions for investments: Include cash spent on purchasing fixed assets, cash received from selling assets, and cash spent on or received from investing in securities.
• Calculate net cash flow from investing activities: Subtract cash payments for investments from cash receipts from sales of investments.

Cash Flow from Financing Activities

• Identify cash transactions for financing: Include cash received from issuing stock or debt and cash spent on repaying debt or buying back stock.
• Calculate net cash flow from financing activities: Subtract cash payments for financing activities from cash receipts from financing activities.

5. Combine All Sections

Add the net cash flows from operating, investing, and financing activities to determine the overall change in cash and cash equivalents for the period.

6. Reconcile with Beginning Cash

Add the change in cash to the beginning cash balance to arrive at the ending cash balance, ensuring it matches the cash balance reported on the balance sheet.

There are two methods of calculating cash flow: the direct method and the indirect method.

Direct Cash Flow Method

The   direct method   adds up all of the cash payments and receipts, including cash paid to suppliers, cash receipts from customers, and cash paid out in salaries. This method of CFS is easier for very small businesses that use the cash basis accounting method.

These figures can also be calculated by using the beginning and ending balances of a variety of asset and liability accounts and examining the net decrease or increase in the accounts. It is presented in a straightforward manner.

Most companies use the accrual basis accounting method. In these cases, revenue is recognized when it is earned rather than when it is received. This causes a disconnect between net income and actual cash flow because not all transactions in net income on the income statement involve actual cash items. Therefore, certain items must be reevaluated when calculating cash flow from operations.

Indirect Cash Flow Method

With the  indirect method , cash flow is calculated by adjusting net income by adding or subtracting differences resulting from non-cash transactions. Non-cash items show up in the changes to a company’s assets and liabilities on the balance sheet from one period to the next. Therefore, the accountant will identify any increases and decreases to asset and liability accounts that need to be added back to or removed from the net income figure, in order to identify an accurate cash inflow or outflow.

Changes in accounts receivable (AR) on the balance sheet from one accounting period to the next must be reflected in cash flow:

• If AR decreases, more cash may have entered the company from customers paying off their credit accounts—the amount by which AR has decreased is then added to net earnings.
• An increase in AR must be deducted from net earnings because, although the amounts represented in AR are in revenue, they are not cash.

What about changes in a company's inventory ? Here's how they are accounted for on the CFS:

• An increase in inventory signals that a company spent more money on raw materials. Using cash means the increase in the inventory's value is deducted from net earnings.
• A decrease in inventory would be added to net earnings. Credit purchases are reflected by an increase in accounts payable on the balance sheet, and the amount of the increase from one year to the next is added to net earnings.

The same logic holds true for taxes payable, salaries, and prepaid insurance . If something has been paid off, then the difference in the value owed from one year to the next has to be subtracted from net income. If there is an amount that is still owed, then any differences will have to be added to net earnings.

Limitations of the Cash Flow Statement

Negative cash flow should not automatically raise a red flag without further analysis. Poor cash flow is sometimes the result of a company’s decision to expand its business at a certain point in time, which would be a good thing for the future.

Analyzing changes in cash flow from one period to the next gives the investor a better idea of how the company is performing, and whether a company may be on the brink of bankruptcy or success. The CFS should also be considered in unison with the other two financial statements (see below).

The indirect cash flow method allows for a reconciliation between two other financial statements: the income statement and balance sheet.

Cash Flow Statement vs. Income Statement vs. Balance Sheet

The cash flow statement measures the performance of a company over a period of time. But it is not as easily manipulated by the timing of non-cash transactions. As noted above, the CFS can be derived from the income statement and the balance sheet . Net earnings from the income statement are the figure from which the information on the CFS is deduced. But they only factor into determining the operating activities section of the CFS. As such, net earnings have nothing to do with the investing or financial activities sections of the CFS.

The income statement includes depreciation expense, which doesn't actually have an associated cash outflow. It is simply an allocation of the cost of an asset over its useful life. A company has some leeway to choose its depreciation method , which modifies the depreciation expense reported on the income statement. The CFS, on the other hand, is a measure of true inflows and outflows that cannot be as easily manipulated.

As for the balance sheet, the net cash flow reported on the CFS should equal the net change in the various line items reported on the balance sheet. This excludes cash and cash equivalents and non-cash accounts, such as accumulated depreciation and accumulated amortization. For example, if you calculate cash flow for 2019, make sure you use 2018 and 2019 balance sheets.

The CFS is distinct from the income statement and the balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded as revenues and expenses . Therefore, cash is not the same as net income , which includes cash sales as well as sales made on credit on the income statements.

Example of a Cash Flow Statement

Below is an example of a cash flow statement: 

Investopedia / Sabrina Jiang

From this CFS, we can see that the net cash flow for the 2017 fiscal year was $1,522,000. The bulk of the positive cash flow stems from cash earned from operations, which is a good sign for investors. It means that core operations are generating business and that there is enough money to buy new inventory.

The purchasing of new equipment shows that the company has the cash to invest in itself. Finally, the amount of cash available to the company should ease investors’ minds regarding the notes payable, as cash is plentiful to cover that future loan expense.

What Is the Difference Between Direct and Indirect Cash Flow Statements?

The difference lies in how the cash inflows and outflows are determined.

Using the direct method, actual cash inflows and outflows are known amounts. The cash flow statement is reported in a straightforward manner, using cash payments and receipts.

Using the indirect method, actual cash inflows and outflows do not have to be known. The indirect method begins with net income or loss from the income statement, then modifies the figure using balance sheet account increases and decreases, to compute implicit cash inflows and outflows.

Is the Indirect Method of the Cash Flow Statement Better Than the Direct Method?

Neither is necessarily better or worse. However, the indirect method also provides a means of reconciling items on the balance sheet to the net income on the income statement. As an accountant prepares the CFS using the indirect method, they can identify increases and decreases in the balance sheet that are the result of non-cash transactions.

It is useful to see the impact and relationship that accounts on the balance sheet have to the net income on the income statement, and it can provide a better understanding of the financial statements as a whole.

What Is Included in Cash and Cash Equivalents?

Cash and cash equivalents are consolidated into a single line item on a company's balance sheet. It reports the value of a business’s assets that are currently cash or can be converted into cash within a short period of time, commonly 90 days. Cash and cash equivalents include currency, petty cash, bank accounts, and other highly liquid, short-term investments. Examples of cash equivalents include commercial paper, Treasury bills, and short-term government bonds with a maturity of three months or less.

A cash flow statement is a valuable measure of strength, profitability, and the long-term future outlook of a company. The CFS can help determine whether a company has enough liquidity or cash to pay its expenses. A company can use a CFS to predict future cash flow, which helps with budgeting matters.

For investors, the CFS reflects a company’s financial health , since typically the more cash that’s available for business operations, the better. However, this is not a rigid rule. Sometimes, a negative cash flow results from a company’s growth strategy in the form of expanding its operations.

By studying the CFS, an investor can get a clear picture of how much cash a company generates and gain a solid understanding of the financial well-being of a company.

Financial Accounting Standards Board. " Summary of Statement No. 95 ."

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