What is a Cash Flow Statement (CFS)?

'Cash Flow Statement (CFS)' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

The Cash Flow Statement (CFS) proves to be one of three critical components in any corporation’s financial reports. The other two are income statements and balance sheets. From 1987, the SEC Securities Exchange Commission has mandated that such cash flow statements be included with all corporate financial reports. This statement details the quantities of cash and cash equivalents that come into and flow out of a firm. Such a CFS permits the stake holders and potential investors alike to comprehend the way corporations’ operations are functioning, how they are effectively spending the money, and from where their money originates in the first place.

There are differences that separate these Cash Flow Statements from the balance sheets and income statements. The principal one is that CFSs do not cover the future anticipated outgoing and incoming cash amounts which have already been recorded under the credit sales category. It explains why the component cash is never identical to net income. Both balance sheets and income statements cover not only cash sales, but also sales that happen on credit. In the end, a firm’s cash flow is derived from three separate means of money coming in and leaving a corporation. These are cash from operations, cash from financing, and cash from investing.

Cash from Operations comprise both the cash inflow and outflow which result from the mainstay operation of the business. This means that they show the quantity of cash that the firms’ services and products actually accrue to the business. Cash from operations would usually include changes to cash, depreciation, accounts receivable, accounts payable, and inventory.

The Cash from Financing component includes loans, changes in debt, and dividends. As capital becomes raised, this is a cash-in accounting item. As dividends pay out, it becomes marked as a cash-out event. As an example, when firms sell bonds on the markets, the firm obtains cash financing. As the corporation pays the associated interest out to the holders of the bonds, then the firm reduces its cash by the corresponding amount.

The final category of Cash from Investing covers all changes in assets, equipment, or company investments. These are commonly considered to be cash out events. This is because cash will be utilized to purchase new buildings, buy factory or other production equipment, and acquire other types of assets which are short term (like securities which are easily marketable). It is not always the case that these are cash negative events though. As any firms choose to sell off one or more of their assets, this creates a cash-in transaction. It would then be notated as a positive accounting item under the cash from investing category. When companies sell shares they hold in another firm, the revenue this generates becomes accounted for under the Cash from Investing.

Cash flow becomes calculated by adjustments that accountants make to net income. They simply add in (or alternatively subtract out) any differences in expenses, revenue, and credit types of transactions that appear on the income statements and balance sheets since the last accounting period. Such transactions happen every accounting period. These adjustments will be reviewed and amended as non-cash items go into the income statement under net income while liabilities and total assets go on to the balance sheet. Since not every type of financial transaction of a firm relates to real cash items, a great number of items must be reconsidered when the accountants are figuring up the cash flow from operations.

Company accountants deduce the cash flow statement calculations and compile them into official corporate report documents every reportable quarter. The SEC requires that they make this a part of every quarterly report and also each annual report which they must divulge to analysts and members of the investing public by law.

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The term 'Cash Flow Statement (CFS)' is included in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.