A statement of cash flows reports the change in a company’s cash position over a period and explains why the change happened. Where the income statement reports revenues and expenses on an accrual basis (you recognise revenue when earned, expenses when incurred, not when cash actually moves), the statement of cash flows traces the actual movement of cash.
The statement is structured into three categories of activities:
Cash flows from operating activities. Cash generated or used by the company’s day-to-day business operations: cash collected from customers, cash paid to suppliers and employees, interest paid and received, income taxes paid. This is the most important section — it measures whether the business itself is producing cash.
Cash flows from investing activities. Cash used to buy long-term assets (PP&E, equipment, businesses) and cash received from selling them. Negative numbers here are typical for growing companies — they’re investing in their future.
Cash flows from financing activities. Cash raised by issuing debt or stock, cash used to repay debt, dividends paid. Tells you whether the company is borrowing/issuing stock (positive) or paying back/buying back (negative).
Sum the three sections and you get the net change in cash for the period. Add the beginning-of-period cash balance and you get the end-of-period cash balance — which agrees with the balance sheet’s cash line at that date.
A simple example: a profitable company sells a service on credit, collects payment 90 days later, and is paying suppliers within 30 days. On the income statement they show profit, but on the cash-flow statement they show negative operating cash flow during the gap. This pattern — profitable but cash-strapped — is one of the most common reasons growing companies fail. The income statement says “doing well”; the cash-flow statement reveals the squeeze.
The relationship: operating cash flow + investing cash flow + financing cash flow = change in cash. Operating cash flow itself relates to net income via working-capital changes, depreciation add-backs, and other reconciliations.
For the related core statements see Income statement and Balance sheet. For ratio-based analysis see Financial ratio analysis. For projection versions see Pro forma financial statements.