Arguably the most important financial statement as it actually tracks the movement of cash, actual cash in the bank. Unlike the income statement which shows the income the company has earned both cash and on credit for a specific time period of time, the cashflow statement is simply concerned with actual cash the company has earned over a period of time.
For example, the Revenue line might be $100m, but $90m on credit and only $10m in cash. As a result, the income statement will record total revue as $100m whereas the cashflow statement will only show revenue as what is actually is in the bank (cash) so only $10m.
This has major cashflow and working capital implications for investment bankers or any analyst looking at a company. The income statement can be very misleading in that sense, and hence why the cashflow statement is widely considered to be one of the more important financial statement.
Example of Financial statement
Starbucks
Tesla
Apple
Amazon
The Cashflow statement is separated into three parts
- Cashflow from Operations
- Cashflow from Investing Activities
- Cashflow from Financing Activities
Starting Line item on the Cashflow statement
Before we make any adjustment the first line item on the Cashflow statement is Net income which is the exact same number located at the bottom of the Income statement. This is what linked the Income Statement and the Cashflow statement together.
Cashflow from Operations
We have to add back any non-cash expenses and subtract any IOU’s which are due to the company as it distracts from measuring the actual cash position. The adjustments here are from a cash perspective only, since we are only concerned with the actual cash in the bank position, expenses like depreciation which in non-cash and only for accounting purposes must be added back as it’s not something which has costed the company money.
Other adjustments which have to be made under operations are working capital related which are listed below.
Cashflow from operating Activities = Net Income + Depreciation + Deferred Taxes + Other non-cash items + Changes in Working Capital
Revenue
Depreciation and amortization
Deferred taxes
Account receivable
Inventory
Accounts payable
Cashflow from Investing Activities
After we have measured and adjusted for exactly how much cash we have made from operations we now need to calculate how much cash the company has made form invest activities. Below is a list of the major line items with an explanation what each of them mean. Remember that an influx of cash regardless of the (Debt / Credit entry) is an increase of cash and anything which uses cash is a drawdown of cash.
Capital Expenditure / CAPEX – this is investments in property plan and Equipment and related to operations and is business as usual. CapEx is a very important metric for the purpose of valuation as you will see in our premium valuation course. This figure / amount is a drain of free cashflow and necessary in order to maintain operations.
Buying and or Selling Assets – this usually arise from the disposal (selling i.e. receiving money) of a large / one of asset or buying an asset which is not business as usual
Investing on or selling marketable and non-marketable securities – this is usually investing (spending money) on company tradable stocks or selling (receiving money). Non-marketable of private listing, non-tradable or very illiquid financial instrument.
Carve outs, spinoffs, M&A and proportioning business entities – When a company sells of a subsidiary or park of the company or buys another company then the direction of cash will be recorded here.
Cashflow from Financing Activities
Cash flow from financing activities relates to cash spent or received as a result of equity and debt issuing and servicing.
Distribution to Equity holders and dividends – This represents an outflow of cash to equity holders via dividends or influx of cash from subsidiary companies
Raising or buying back equity – This is essentially money which the company spends on buying back the company’s shares from the open market or selling more shares which will give the company an influx of money.
Raising or paying short term debt e.g. Revolver – Revolvers are like a credit card for companies to access short term capital which will be an influx of cash. However, this also needs to be repaid which will then represent an outflow of cash.
Raising or paying Long term debt – If you raise debt then that is cash which is available and will of course increase the cash balance in the bank. Vice versa, when the debt becomes due and has to be paid then that is a drain on the cash position which will be reflected here.
Effects from Currency changes – companies which deals in international markets will collect revenues in different curries which will need to be converted into the reporting currency for reporting and measuring purposes. This currency difference is noted here and any currency hedging which has taken place to mitigate any currency loss.
Net cash position at back – the final cash amount will then be the ending cash balance on the balance sheet.
The cashflow statement is part of the 3 financial statement (Income Statement, Balance Sheet and Cashflow Statement). Just as the Net Income line item from the Income statement flows through in to the cashflow statement by being the first line item. Now the endling line item on the cashflow statement will be the ending cash balance in the balance sheet under current assets, and this is one of the ways all of the financial statements are all connected. Take a look at our other article and videos on YouTube to learn more about the other statements.
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