The cash flow statement can provide important information about the performance of a business. Income statements can provide revenue, expense, and income information, but can exclude important items. For example, a capital intensive business like a utility company or a real estate investment trust will have significant depreciation expenses. A company could have minimal income, but very strong cash flow. A cash flow statement can also provide key information about accounts receivable, which can indicate the ability of a business to collect from their customers.

There are three components to a GAAP prepared cash flow statements. These are cash flows from operating activities, cash flow from investing activities, and cash flow from financing activities. The cash flow statement starts with net income and then makes adjustments in these three sections.

Cash Flow from Operating Activities

The cash flow from operating activities component of the cash flow statement provides an adjustment for depreciation and amortization expenses. These are non-cash expenses that are added back from the income statement. As noted above, businesses that require significant capital expenditures tend to have high depreciation expenses. For these businesses, the cash flow statement can provide a better indication of how the business is performing. Companies that have made many acquisitions can report significant amortization expenses as goodwill associated with these purchases is amortized over time.

The cash flow from operating activities component also provides an indication of how changes in the balance sheet impact cash flow. If a company is accumulating a significant amount of inventory, this will show up on the cash flow statement. Businesses often report revenue when a sale is made, not when it is collected. If there is a large negative adjustment to the income statement here, it could indicate that a business is having trouble collecting from their customers. It can also show adjustments made for accounts payable. A company should seek to extend the length of time before they pay their bills, without incurring penalties. The cash flow statement can show important details about a the operations of a business within the cash flow from operating activities portion of the cash flow statement.

Cash Flow from Investing Activities

The cash flow from investing activities portion of the cash flow statement will show a company’s capital expenditures plus any other investing activities that have occurred during the period. Capital expenditures represent big ticket items such as equipment or property purchases. In some cases, examining capital expenditures can yield information on whether or not a business is deferring needed capital expenditures for too long. Some companies can also show other investments on this portion of their cash flow statement such as the purchase of marketable securities or even other companies.

Cash Flow from Financing Activities

The cash flow from financing activities portion of the cash flow statement will report information on items such as the issuance of or repurchase of stock, the addition or pay down of debt, and any dividends that were paid during the period. A company could report positive cash flow, but sometimes only due to the issuance of debt or stock. Conversely, a strong business may be maintaining a constant cash balance due to the aggressive reduction of debt or repurchase of stock. This is the section of the cash flow statement that can provide this information. This section can also provide information regarding whether or not a company is paying out excessive dividends.

Cash Reconciliation and Conclusion

The cash flow statement also provides the change in cash and cash equivalents during the period. Combined with the other components of the cash flow statement, important information about the health of a business could be found. For some businesses, the cash flow statement is crucial. Companies that require significant capital expenditures or have recently purchased another company will have depreciation and amortization expenses that can cloud the true cash earnings of a business. Inventory levels in a retail business are important to track. If inventory cannot be moved and there is a large amount of cash tied up in inventory, cash will not be available for other necessities. If sales cannot be collected from customers, the accounts receivable portion of the cash flow statement will show this information. The cash flow statement is an important part of the analysis of any company or business.