Perfect — Cash Flow is the third major financial statement (after Income
Statement and Balance Sheet) and it tells a very different story. Let’s break it
down:
1. Definition
Cash flow refers to the movement of actual cash in and out of a business
over a specific period.
The Cash Flow Statement shows:
“Where did the company’s cash come from, and where did it go during this
period?”
Unlike the income statement (which uses accrual accounting), cash flow
focuses only on cash transactions — money physically received or paid.
2. Purpose
Tracks liquidity (can the business pay bills and debts on time?)
Shows whether profits are actually turning into cash
Helps detect cash shortages early
Gives investors insight into the company’s ability to fund operations,
invest, and pay dividends
3. Structure of a Cash Flow Statement
It’s usually divided into three sections:
A. Cash Flow from Operating Activities
Cash generated or used in the company’s core business operations.
Examples:
Cash from sales (inflows)
Payments to suppliers & employees (outflows)
Interest & tax payments
📌 This is the most important section — positive operating cash flow usually
means the business is healthy.
B. Cash Flow from Investing Activities
Cash spent or received from buying or selling long-term assets.
Examples:
Buying equipment, property, or software (outflows)
Selling equipment or investments (inflows)
C. Cash Flow from Financing Activities
Cash from transactions with owners or lenders.
Examples:
Taking or repaying loans
Issuing shares (inflow)
Paying dividends (outflow)
4. Example of a Simple Cash Flow Statement
Cash Flow Statement (Year Amount
Ended 2024) ($)
Operating Activities
Net Cash from Operations 25,000
Investing Activities
Purchase of Equipment (10,000)
Financing Activities
Loan Repayment (5,000)
Dividend Payment (3,000)
Net Change in Cash 7,000
Beginning Cash Balance 13,000
Cash Flow Statement (Year Amount
Ended 2024) ($)
Ending Cash Balance 20,000
✅ Ending cash matches what you would see in the balance sheet’s cash
account.
5. Why It’s Important
Liquidity check: Profit ≠ cash. A company can be “profitable” but run
out of cash.
Decision-making: Helps plan for investments, expansions, and debt
repayment.
Investor insight: Shows if the company is self-sustaining or needs
outside funding.
6. Key Difference from Income Statement
Income Statement → Shows profit (includes non-cash items like
depreciation).
Cash Flow Statement → Shows real cash movement — helps verify if
profits are turning into actual cash.
Would you like me to make a visual diagram of the three financial
statements (Income Statement → Balance Sheet → Cash Flow) to show how
they are connected? It’s very helpful to see how net income, assets, and
cash tie together.
