This lesson examines the statement of cash flows, which explains the changes in cash and cash equivalents during a period .

5.1 Structure and Purpose of the Cash Flow Statement

The statement of cash flows reconciles the opening and closing cash balance by reporting cash flows from three activities :

  • Operating Activities: Cash flows from the principal revenue-producing activities, such as receipts from customers and payments to suppliers and employees.

  • Investing Activities: Cash flows from the acquisition and disposal of long-term assets, such as property, plant, and equipment, and investments.

  • Financing Activities: Cash flows from transactions with the entity’s owners and creditors, such as issuing shares, borrowing, and repaying debt .

The Swayam course dedicates multiple weeks to cash flow analysis, including preparation and interpretation . The University of Exeter module requires students to “compare cash flows from operating, investing and financing activities and classify cash flow items to each of these categories” .

5.2 Key Concepts in Cash Flow Analysis

The cash flow statement provides critical insight into an entity’s liquidity and ability to generate cash . Analysts calculate free cash flow to the firm (FCFF) and free cash flow to equity (FCFE), and cash flow performance and coverage ratios . Cash flows from operating activities (CFO) are often considered a more reliable indicator of financial health than net income, as they are less susceptible to manipulation . The University of Jyväskylä course covers cash flow analysis as part of its core curriculum .

5.3 Preparing and Interpreting the Cash Flow Statement

The cash flow statement can be prepared using the direct method (reporting major classes of gross cash receipts and payments) or the indirect method (starting with net income and adjusting for non-cash items) . Both methods classify cash flows into operating, investing, and financing activities. The indirect method is more common in practice. The Swayam course covers preparation of the cash flow statement and interpretation .

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