Cash Flow Statement & Financial Statements – Part 8

In this section I will break down the cash flow statement of a company, which is part of the financial statements.  The Cash Flow Statement is an important part of the financial statement.  The cash flow statement encompasses three different areas that if you understand these areas you will have a better understanding of what the cash flow statement is, what to look for within the cash flow statement, and how to interpret the information.

What is the Cash Flow Statement

The cash flow statement breaks down where money came and went within a firm for a period of time.  There are three main areas of the cash flow statement.  The three sections of the cash flow statement are:

  • Cash from Operating Activities
  • Cash from Investing Activities
  • Cash from Financing Activities

These are the three main areas of cash flow.  And, at the very bottom, when all of the cash flow from operations, investing, and financing are added and subtracted, the company shows its Free Cash Flow.  This is an important number that investors are ultimately striving for.  Free Cash Flow is the amount of money that a firm’s operating cash flow exceeds working capital needs as well as expenditures on assets.(Wikipedia Free Cash Flow))

Cash flow, ultimately, is one of the main goals for owning a company’s stock.  With cash flow, a business can provide dividends to investors who are ultimately the owners of the company and are the individuals that the company works for.  Cash flow breaks down where cash has entered into the firm and where it is being spent.  Breaking out these numbers shows what is possible for the firm in the future with consideration from results of investments and paying down debts.

Cash from Operating Activities

Here is Apple Inc, Cash Flows from Operating Activities: [1]Nasdaq Apple Inc  Apple - AAPL Cash Flow Statement Operating Activities

In the above example, you can see how everything breaks down.  First, net income is at the top.  Then, Depreciation and Amortization are added back into Net Income plus any necessary adjustments.  This is cash flows from operating activities.

The next segment is changes/adjustments to the operating cash flows.  After adding in accounts receivables and deducting liabilities and other adjustments, the remainder is the Net Cash Flow from Operations.

Changes in Working Capital

There is a phrase that is important to understand especially if you are putting together Discounted Cash Flow Calculations.  This phrase is: Changes in Working Capital.  Changes in working capital encompasses what is going on in total working capital from one period to another.  And, many firms break down the individual aspects of the changes in working capital.  These different areas are:

  • Changes in Accounts Receivable
  • Changes in Taxes Payable
  • Changes in Accounts Payable
  • Changes in Accrued Expenses
  • Changes in Inventories
  • Changes in Other Assets/Liabilities

The totals are usually shown are the amount changed from one period to another.  This is an important number to keep in mind when calculating Discounted Cash Flow Calculators.

Cash from Investing Activities

Here is Apple Inc, Cash Flows from Investing Activities: [2]Nasdaq Apple Inc

Apple - AAPL Cash Flow Statement Investing Activities

In the next section, Cash Flow from Investing.  Here, for Apple Inc., the very top two are important aspects of the cash flow statement.  Capital Expenditures CapEx, will enable Apple Inc., to advance revenues in the future should their capital expenditures pay off for the firm.  Investments are similar and may be equally as fruitful if investments that Apple Inc. has made reap benefits.  All of these lines are added up (Equaling $22M in the Apple Inc example), but they are then subtracted from Net Cash Flows from Operations above.

Cash From Financing Activities

Here is Apple Inc, Cash Flows from Financing Activities: [3]Nasdaq Apple Inc

Apple - AAPL Cash Flow Statement Financing Activities

The final section of the cash flow statement is the financing activities section and this shows what bets were either accumulated or paid off during a period.  The total amount is deducted from the remaining amount of Cash flow from operations less cash flow from investing.

Free Cash Flow

One thing to understand is that Free Cash Flow is similar to Net Earnings.  However, Free Cash Flow takes into consideration capital goods expenditures as well as changes in working cash flow.  A common formula for calculating free cash flow is to take earnings before interest and taxation (EBIT), add in depreciation and amortization, then subtract taxes, changes in working capital, and capital expenditures (CapEx).


1, 2, 3 Nasdaq Apple Inc

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