- The statement of cash flows
is the baby of the financial statements.
The balance sheet and the income statement,
they've been around for over 500 years.
In contrast, the statement of cash flows
first started appearing in just 1988,
so it's brand-new in an accounting sense.
Now, as we talk about the statement of cash flows,
you're going to wonder why accountants
didn't invent it sooner.
I ask myself the same question.
The idea behind the statement of cash flows is so simple.
The statement of cash flows
is a report of the amount of cash collected
and the amount of cash paid by a company during a period,
a month, quarter, or year.
Well, that's a pretty easy concept.
We're just focusing on cash.
How much cash did you collect, how much cash did you pay?
Now, the structure of the statement of cash flows
is to separate the cash flows into three categories.
Operating activities, investing activities,
and financing activities.
Now, let me tell you what those three activities are.
Operating activities are the things that you do
every single day, your operations.
Now, when would you collect cash from operating activities?
Walmart collects cash from its operating activities
when it collects cash from selling items to you and me.
A consulting company collects cash
by providing consulting services to you and me,
and then collecting the cash from us.
Those are cash inflows from operating activities.
Examples of cash outflows from operating activities
are cash paid for wages, for utilities,
for taxes, for interest.
Operating activities are the things
that a company does routinely every single day.
The next category of cash flows is investing activities.
Here, the word investing
means investing in the productive capacity of the business.
So, cash outflows from investing activities
are buying new buildings, buying new land,
buying new machines.
Now, the third category of cash flows
is financing activities.
Financing activities are just what they sound like.
I'm getting the cash to pay
for the necessary things in my business.
I'm borrowing some money,
I'm getting new investment from owners.
Those are cash inflows from financing activities.
Cash outflows from financing activities,
well, I'm repaying those loans,
I'm paying dividends to my owners.
Those are cash outflows from financing activities.
Operating activities, those are the things that I do
every single day, repetitively, over and over.
I'm in the business to conduct operations,
that's what I exist for.
Investing activities are expanding
the productive capacity of my business.
Financing activities are getting the cash
to do what I need to do.
I'm borrowing money and I'm paying it back.
I'm getting cash from shareholders
and I'm paying 'em dividends.
Cash from operating activities,
cash from investing activities,
and cash from financing activities.
That is the statement of cash flows.
It's only been around for 30 years,
but it has been an awesome 30 years.