Cash management is an important function for every business. Knowing what cash is expected to be received and what cash is required for payments is critical information in determining whether a company has excess cash for investment or will need additional cash to meet operating needs such as paying its employees or its suppliers.
The financial statement that reports activity in cash and cash equivalents for a period of time is called the statement of cash flows. Cash equivalents are highly liquid, short‐term investments that usually mature within three months of their purchase. U.S. Treasury bills, money market funds, and commercial paper are usually classified as cash equivalents. In this discussion when cash is used, it refers to cash and cash equivalents.
The statement of cash flows has four main sections: Three are used to classify the types of cash inflows and outflows during the period and the fourth reconciles the total cash balance from the beginning to the end of the period. A skeleton outline of the statement of cash flows would look like this:
As with all statements, the statement of cash flows has a three‐line heading stating the name of the company, the name of the statement, and the time period being reported on the statement (for example, month, quarter, year) with the period end date. The three sections of the statement are the operating, investing, and financing activities.
Operating activities
The first section is operating activities This section tells the reader whether or not the company generated cash from its day‐to‐day operations. These activities include cash collections from customers, payments to employees and suppliers, tax payments, the receipt of interest and dividends and interest paid. There are two acceptable methods of reporting operating activities. Each method is discussed under the topic “Preparing the Statement of Cash Flows.”
Investing activities
The second section is investing activities, which reflects how the company is using cash to grow/maintain its business. This section reports the activity in long‐term asset accounts, such as land, buildings, equipment, intangible assets, and investments (excluding those classified as cash equivalents). If a company has collections from long‐term notes receivable, they are reported as operating cash flows if the note receivable resulted from a sale to a customer, or investing cash flows if the note was taken for another purpose. Typical investing activities include the purchase and sale of equipment, purchase and sale of securities, and making and collecting loans.
Financing activities
In the third section, financing activities, the reader learns how the company chose to pay for its growth. Financing activities reports the activity in the long‐term liability and stockholders' equity accounts. Typical financing activities are receipt and payment of loans, issuance of stock, payment of dividends, and repurchase of the company's stock.
In reporting the changes in cash in the investing and financing activities sections, each type of cash inflow or outflow is shown separately in the statement. For example, if the company sold equipment for $7,000 cash and purchased equipment for $50,000, the statement would report these two activities separately. Similarly, if the company borrows $1,000,000 and repays $150,000 during the period, these activities are reported separately. See Table 1 for major classifications of cash flow by category .
Cash reconciliation
The fourth section, the cash reconciliation, begins with the net change (increase or decrease) in cash that is the total of the operating, investing, and financing activities sections. The beginning of the period cash balance is added to the net change to obtain the ending cash balance. The ending cash balance is the same as cash on the balance sheet as of the end of the period.
Although the statement excludes non‐cash transactions, significant non‐cash transactions must be disclosed to the reader either below the statement or in the notes to the financial statements.
FAQs
The three sections of the cash flow statement are: operating activities, investing activities and financing activities. Companies can choose two different ways of presenting the cash flow statement: the direct method or the indirect method. Most use the indirect method.
What are the three major sections of the statement? ›
The statement categorizes cash activities into three areas: operating activities, investing activities, and financing activities.
What are the 5 components of the financial statement? ›
The major elements of the financial statements (i.e., assets, liabilities, fund balance/net assets, revenues, expenditures, and expenses) are discussed below, including the proper accounting treatments and disclosure requirements.
What are the four sections of financial statements? ›
Financial statements can be divided into four categories: balance sheets, income statements, cash flow statements, and equity statements.
What is the 3 statement model? ›
What is a 3-Statement Model? The 3-Statement Model is an integrated model used to forecast the income statement, balance sheet, and cash flow statement of a company for purposes of projecting its forward-looking financial performance.
What are the 3 primary statements? ›
Key Highlights. The three core financial statements are 1) the income statement, 2) the balance sheet, and 3) the cash flow statement. These three financial statements are intricately linked to one another.
What are the big 3 statements? ›
“The three financial statements are the income statement, balance sheet, and statement of cash flows.
What are the 10 key elements that make up all the financial statements? ›
The 10 elements are: (1) assets, (2) liabilities, (3) equity, (4) investments by owners, (5) distributions to owners, (6) revenues, (7) expenses, (8) gains, (9) losses, and (10) comprehensive income. The 10 elements of financial statements defined in SFAC 6 describe financial position and periodic performance.
Are there five basic financial statements? ›
The five key documents include your profit and loss statement, balance sheet, cash-flow statement, tax return, and aging reports.
What is the structure of the financial statements? ›
The three main types of financial statements are the balance sheet, the income statement, and the cash flow statement. These three statements together show the assets and liabilities of a business, its revenues, and costs, as well as its cash flows from operating, investing, and financing activities.
The balance sheet, income statement, and cash flow statement each offer unique details with information that is all interconnected. Together the three statements give a comprehensive portrayal of the company's operating activities.
What are the 4 classification of financial statements? ›
For-profit businesses use four primary types of financial statement: the balance sheet, the income statement, the statement of cash flow, and the statement of retained earnings. Read on to explore each one and the information it conveys.
What are the four fundamentals of accounts? ›
Typically, you'll need all four: the income statement, the balance sheet, the statement of cash flow, and the statement of owner equity. By preparing these four accounting financial statements, you will be able to see how well your company's finances are doing or find areas that need improvement.
What are the three financial statement analysis? ›
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
How are the three financial statements linked? ›
Net Income & Retained Earnings
Net income from the bottom of the income statement links to the balance sheet and cash flow statement. On the balance sheet, it feeds into retained earnings and on the cash flow statement, it is the starting point for the cash from operations section.
What is the 3 way cashflow model? ›
A three-way forecast, also known as the 3 financial statements is a financial model combining three key reports into one consolidated forecast. It links your Profit & Loss (income statement), balance sheet and cashflow projections together so you can forecast your future cash position and financial health.
What are the three types of statements? ›
Are there only three types of statements?
- Simple statements (e.g "it is raining" or "the dog is red")
- Compound statements (e.g "it is raing and the dog is red")
- If-then statements (e.g "if it is raining then the dog is red")
The main components of the CFS are cash from three areas: Operating activities, investing activities, and financing activities.
What are the three 3 sections comprising the statement of financial position? ›
As an overview of the company's financial position, the balance sheet consists of three major sections: (1) the assets, which are probable future economic benefits owned or controlled by the entity; (2) the liabilities, which are probable future sacrifices of economic benefits; and (3) the owners' equity, calculated as ...
What are the three sections of an income statement? ›
The income statement presents revenue, expenses, and net income.
