People often believe that a cash flow statement shows a company's profitability. But that’s not the case…they are two different things.
A cash flow statement lists only the cash inflows and outflows. It helps us understand where the cash is coming in and where the company is spending it. While the income statement lists cash as well as credit income and expenses.
A cash flow statement helps an investor analyze a company's liquidity. While the income statement helps analyze the profitability.
So, what if we can skip the cash flow statement and instead focus on the income statement only?
The answer is simple. No, we can’t skip the cash flow statement. The reason behind the same is simpler!
Let’s understand this with an example -In this example, the company’s income statement shows a net profit of Rs. 400. But when we look at cash transactions in isolation, the company is incurring a loss of Rs. 100.How to interpret this information? Does this mean that the company is not safe to invest in? We will learn that in this article.The above example explains why we must analyze the cash flow statement. Cash flow tells us if the company has enough cash to pay its expenses to avoid insolvency.Cash Flow Statement Format:There are three sources of cash flow -
- Cash Flow from Operating Activity
- Cash Flow from Investing Activity
- Cash Flow from Financing Activity
- Cash Flow from Operating Activities
- Effects of exchange rates on translations of operating cash flows:
- Adjustment for changes in working capital:
- Net cash flow from operating activities
- Purchase of investments
- Sale of investments
- Net cash flow from investing activities
- Cash Flow from Financing Activities
- Repayment of Borrowing
- Dividend Paid
- Net cash flow from financing activities