The Cash Flow Statement (CFS) provides a detailed report on a company's cash receipts (inflows) and cash payments (outflows) during a specific accounting period. Its primary purpose is to complement the accrual-based Income Statement and Balance Sheet by showing how a company generates and uses actual cash. This statement is the ultimate test of a company's short-term viability and liquidity.
The CFS is structured into three sections that categorize all cash movements:
This section reports the cash generated from a company's principal revenue-producing activities. It essentially reconciles Net Income (which is on an accrual basis) to the actual cash generated by the business operations. CFO is often considered the most important section because it indicates whether the core business can generate cash sustainably without relying on external funding.
This section reports the cash used for or generated from the acquisition and disposal of long-term assets and other investments. This includes activities like buying or selling property, plant, and equipment (PP&E)—known as Capital Expenditures (CapEx)—or purchasing and selling marketable securities. A negative CFI often signifies that a company is investing in its future growth.
This section reports cash flows that result from transactions with the company's owners (shareholders) and creditors (lenders). Activities include issuing or repaying debt, issuing or repurchasing stock, and paying dividends to shareholders.
A company buys a new factory for $10 million using cash. In which section of the Cash Flow Statement would this transaction be reported? Would it be a cash inflow or an outflow?
Answer: It would be reported as a cash outflow in the Cash Flow from Investing Activities (CFI) section, as it is a capital expenditure.