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In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement,^[1] is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet.^[1] As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements.

People and groups interested in cash flow statements include:

Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses
Potential lenders or creditors, who want a clear picture of a company's ability to repay
Potential investors, who need to judge whether the company is financially sound
Potential employees or contractors, who need to know whether the company will be able to afford compensation
Shareholders of the business.

Purpose

Statement of Cash Flow - Simple Example for the period 01/01/2006 to 12/31/2006
Cash flow from operations	$4,000
Cash flow from investing	$(1,000)
Cash flow from financing	$(2,000)
Net cash flow	$1,000
Parentheses indicate negative values

The cash flow statement was previously known as the flow of funds statement.^[2] The cash flow statement reflects a firm's liquidity.

The balance sheet is a snapshot of a firm's financial resources and obligations at a single point in time, and the income statement summarizes a firm's financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues. The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments. These noncash transactions include depreciation or write-offs on bad debts or credit losses to name a few.^[3] The cash flow statement is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Noncash activities are usually reported in footnotes.

The cash flow statement is intended to^[4]

provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances
provide additional information for evaluating changes in assets, liabilities and equity
improve the comparability of different firms' operating performance by eliminating the effects of different accounting methods
indicate the amount, timing and probability of future cash flows

The cash flow statement has been adopted as a standard financial statement because it eliminates allocations, which might be derived from different accounting methods, such as various timeframes for depreciating fixed assets.^[5]

History & variations

Cash basis financial statements were common before accrual basis financial statements. The "flow of funds" statements of the past were cash flow statements.

In 1863, the Dowlais Iron Company had recovered from a business slump, but had no cash to invest for a new blast furnace, despite having made a profit. To explain why there were no funds to invest, the manager made a new financial statement that was called a comparison balance sheet, which showed that the company was holding too much inventory. This new financial statement was the genesis of Cash Flow Statement that is used today^[6].

In the United States in 1971, the Financial Accounting Standards Board (FASB) defined rules that made it mandatory under Generally Accepted Accounting Principles (US GAAP) to report sources and uses of funds, but the definition of "funds" was not clear."Net working capital" might be cash or might be the difference between current assets and current liabilities. From the late 1970 to the mid-1980s, the FASB discussed the usefulness of predicting future cash flows.^[7] In 1987, FASB Statement No. 95 (FAS 95) mandated that firms provide cash flow statements.^[8] In 1992, the International Accounting Standards Board issued International Accounting Standard 7 (IAS 7), Cash Flow Statements, which became effective in 1994, mandating that firms provide cash flow statements.^[9]

US GAAP and IAS 7 rules for cash flow statements are similar, but some of the differences are:

IAS 7 requires that the cash flow statement include changes in both cash and cash equivalents. US GAAP permits using cash alone or cash and cash equivalents.^[5]
IAS 7 permits bank borrowings (overdraft) in certain countries to be included in cash equivalents rather than being considered a part of financing activities.^[10]
IAS 7 allows interest paid to be included in operating activities or financing activities. US GAAP requires that interest paid be included in operating activities.^[11]
US GAAP (FAS 95) requires that when the direct method is used to present the operating activities of the cash flow statement, a supplemental schedule must also present a cash flow statement using the indirect method. The IASC strongly recommends the direct method but allows either method. The IASC considers the indirect method less clear to users of financial statements. Cash flow statements are most commonly prepared using the indirect method, which is not especially useful in projecting future cash flows.^[12]

Cash flow activities

The cash flow statement is partitioned into three segments, namely: cash flow resulting from operating activities, cash flow resulting from investing activities, and cash flow resulting from financing activities.

The money coming into the business is called cash inflow, and money going out from the business is called cash outflow.

Operating activities

Operating activities include the production, sales and delivery of the company's product as well as collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising, and shipping the product.

Under IAS 7, operating cash flows include:^[11]

Receipts from the sale of goods or services
Receipts for the sale of loans, debt or equity instruments in a trading portfolio
Interest received on loans
Dividends received on equity securities
Payments to suppliers for goods and services
Payments to employees or on behalf of employees
Interest payments (alternatively, this can be reported under financing activities in IAS 7, and US GAAP)

Items which are added back to [or subtracted from, as appropriate] the net income figure (which is found on the Income Statement) to arrive at cash flows from operations generally include:

Depreciation (loss of tangible asset value over time)
Deferred tax
Amortization (loss of intangible asset value over time)
Any gains or losses associated with the sale of a non-current asset, because associated cash flows do not belong in the operating section.(unrealized gains/losses are also added back from the income statement)

Investing activities

Examples of Investing activities are

Purchase or Sale of an asset (assets can be land, building, equipment, marketable securities, etc.)
Loans made to suppliers or received from customers
Payments related to mergers and acquisitions

Financing activities

Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividends as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities section of the cash flow statement.

Under IAS 7,

Proceeds from issuing short-term or long-term debt
Payments of dividends
Payments for repurchase of company shares
Repayment of debt principal, including capital leases
For non-profit organizations, receipts of donor-restricted cash that is limited to long-term purposes

Items under the financing activities section include:

Dividends paid
Sale or repurchase of the company's stock
Net borrowings
Payment of dividend tax

Disclosure of non-cash activities

Under IAS 7, noncash investing and financing activities are disclosed in footnotes to the financial statements. Under US General Accepted Accounting Principles (GAAP), noncash activities may be disclosed in a footnote or within the cash flow statement itself. Noncash financing activities may include^[11]

Leasing to purchase an asset
Converting debt to equity
Exchanging noncash assets or liabilities for other noncash assets or liabilities
Issuing shares in exchange for assets

Preparation methods

The direct method of preparing a cash flow statement results is a more easily understood report.^[13] The indirect method is almost universally used, because FAS 95 requires a supplementary report similar to the indirect method if a company chooses to use the direct method.

Direct method

The direct method for creating a cash flow statement reports major classes of gross cash receipts and payments. Under IAS 7, dividends received may be reported under operating activities or under investing activities. If taxes paid are directly linked to operating activities, they are reported under operating activities; if the taxes are directly linked to investing activities or financing activities, they are reported under investing or financing activities.

Sample cash flow statement using the direct method^[14]

Cash flows from (used in) operating activities
Cash receipts from customers	3000
Cash paid to suppliers and employees	(2,000)
Cash generated from operations (sum)	7,500
Interest paid	(2,000)
Income taxes paid	(4,000)
Net cash flows from operating activities		2,500
Cash flows from (used in) investing activities
Proceeds from the sale of equipment	7,500
Dividends received	3,000
Net cash flows from investing activities		10,500
Cash flows from (used in) financing activities
Dividends paid	2,500
Net cash flows used in financing activities		(2,500)
.
Net increase in cash and cash equivalents		10,500
Cash and cash equivalents, beginning of year		1,000
Cash and cash equivalents, end of year		$11,500

Indirect method

The indirect method uses net-income as a starting point, makes adjustments for all transactions for non-cash items, then adjusts for all cash-based transactions. An increase in an asset account is subtracted from net income, and an increase in a liability account is added back to net income. This method converts accrual-basis net income (or loss) into cash flow by using a series of additions and deductions.^[15]

Rules

The following rules are used to make adjustments for changes in current assets and liabilities, operating items not providing or using cash and nonoperating items.^[16]

Decrease in non-cash current assets are added to net income
Increase in non-cash current asset are subtracted from net income
Increase in current liabilities are added to net income
Decrease in current liabilities are subtracted from net income
Expenses with no cash outflows are added back to net income (depreciation and/or amortization expense are the only operating items that have no effect on cash flows in the period)
Revenues with no cash inflows are subtracted from net income
Non operating losses are added back to net income
Non operating gains are subtracted from net income

Example: cash flow of Citigroup:^[17]^[18]^[19]

Citigroup Cash Flow Statement (all numbers in millions of US$)
Period ending	12/31/2007	12/31/2006	12/31/2005
Net income	21,538	24,589	17,046
Operating activities, cash flows provided by or used in:
Depreciation and amortization	2,790	2,592	2,747
Adjustments to net income	4,617	621	2,910
Decrease (increase) in accounts receivable	12,503	17,236	--
Increase (decrease) in liabilities (A/P, taxes payable)	131,622	19,822	37,856
Decrease (increase) in inventories	--	--	--
Increase (decrease) in other operating activities	(173,057)	(33,061)	(62,963)
Net cash flow from operating activities	13	31,799	(2,404)
Investing activities, cash flows provided by or used in:
Capital expenditures	(4,035)	(3,724)	(3,011)
Investments	(201,777)	(71,710)	(75,649)
Other cash flows from investing activities	1,606	17,009	(571)
Net cash flows from investing activities	(204,206)	(58,425)	(79,231)
Financing activities, cash flows provided by or used in:
Dividends paid	(9,826)	(9,188)	(8,375)
Sale (repurchase) of stock	(5,327)	(12,090)	133
Increase (decrease) in debt	101,122	26,651	21,204
Other cash flows from financing activities	120,461	27,910	70,349
Net cash flows from financing activities	206,430	33,283	83,311
Effect of exchange rate changes	645	(1,840)	731
Net increase (decrease) in cash and cash equivalents	2,882	4,817	2,407

Notes and references

^ ^a ^b Helfert, Erich A. (2001). "The Nature of Financial Statements: The Cash Flow Statement". Financial Analysis - Tools and Techniques - A Guide for Managers. McGraw-Hill. p. 42. doi:10.1036/0071395415. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
^ Bodie, Zane (2004). Essentials of Investments, 5th ed. McGraw-Hill Irwin. p. 455. ISBN 0072510773. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
^ Epstein, Barry J. (2007). Interpretation and Application of International Financial Reporting Standards. John Wiley & Sons. pp. 91–97. ISBN 9780471798231. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
^ Epstein, pp.90-91.
^ ^a ^b Epstein, p. 91.
^ Watanabe, Izumi: The evolution of Income Accounting in Eighteenth and Nineteenth Century Britain, Osaka University of Economics, Vol.57, No. 5, January 2007, p.27-30 [1]
^ Epstein, p. 90.
^ Bodie, p.454.
^ Epstein, p. 88
^ Epstein, p. 92.
^ ^a ^b ^c Epstein, p. 93.
^ Epstein, p. 97.
^ Epstein, p. 95.
^ Epstein, p. 101
^ Epstein, p. 94.
^ Wild, John Paul. Fundamental Accounting Principles (18th edition ed.). New York: McGraw-Hill Companies. pp. 630–633. ISBN 0-07-299653-6. {{cite book}}: |edition= has extra text (help)
^ Yahoo finance report on Citigroup
^ Citigroup finance report
^ Bodie, p. 455.

[helfert-a-1] Helfert, Erich A. (2001). "The Nature of Financial Statements: The Cash Flow Statement". Financial Analysis - Tools and Techniques - A Guide for Managers. McGraw-Hill. p. 42. doi:10.1036/0071395415. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)

[2] Bodie, Zane (2004). Essentials of Investments, 5th ed. McGraw-Hill Irwin. p. 455. ISBN 0072510773. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)

[3] Epstein, Barry J. (2007). Interpretation and Application of International Financial Reporting Standards. John Wiley & Sons. pp. 91–97. ISBN 9780471798231. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)

[4] Epstein, pp.90-91.

[Epstein,_p._91-5] Epstein, p. 91.

[6] Watanabe, Izumi: The evolution of Income Accounting in Eighteenth and Nineteenth Century Britain, Osaka University of Economics, Vol.57, No. 5, January 2007, p.27-30 [1]

[7] Epstein, p. 90.

[8] Bodie, p.454.

[9] Epstein, p. 88

[10] Epstein, p. 92.

[Epstein,_p._93-11] Epstein, p. 93.

[12] Epstein, p. 97.

[13] Epstein, p. 95.

[14] Epstein, p. 101

[15] Epstein, p. 94.

[16] Wild, John Paul. Fundamental Accounting Principles (18th edition ed.). New York: McGraw-Hill Companies. pp. 630–633. ISBN 0-07-299653-6. {{cite book}}: |edition= has extra text (help)

[17] Yahoo finance report on Citigroup

[18] Citigroup finance report

[19] Bodie, p. 455.

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@@ Line 120: / Line 120: @@
 * Payment of dividend tax
-==Disclosure of noncash activities==
+==Disclosure of non-cash activities==
 Under IAS 7, noncash investing and financing activities are disclosed in footnotes to the financial statements. Under US General Accepted Accounting Principles (GAAP), noncash activities may be disclosed in a footnote or within the cash flow statement itself. Noncash financing activities may include<ref name="Epstein, p. 93"/>
 * Leasing to purchase an asset