What is a Cash Flow Statement?

Understanding the cash flow statement

While the income statement reports profit and the balance sheet shows financial position at a point in time, the cash flow statement focuses solely on cash movements. It helps explain how a business generates cash, how that cash is used and whether sufficient liquidity is available to support day-to-day operations and future investment.

Cash flows are typically grouped into three categories. Operating activities relate to the core trading activities of the business. Investing activities include the purchase and disposal of long-term assets and investments. Financing activities cover transactions such as borrowing, loan repayments, share issues and dividend payments.

The cash flow statement is an important part of financial reporting under accounting frameworks such as FRS 102 and IFRS Accounting Standards, where applicable. It is also widely used by business owners, lenders and investors when assessing liquidity, financial resilience and the ability to generate cash over time.

Key features of a cash flow statement

• It reports cash inflows and outflows during an accounting period.
• Cash movements are classified into operating, investing and financing activities.
• It explains changes in an entity’s cash and cash equivalents.
• It provides insight into liquidity and cash generation rather than profitability.
• It supports financial analysis, investment decisions and cash flow planning.

How the cash flow statement works

1. Cash transactions are identified throughout the accounting period.
2. Cash movements are classified as operating, investing or financing activities.
3. The total cash inflows and outflows are calculated for each category.
4. The statement reconciles the opening and closing cash balances reported in the financial statements.

Cash flow statements in practice

A profitable manufacturing company invests heavily in new machinery during the year. Although it reports a healthy profit, the cash flow statement shows a significant cash outflow from investing activities, explaining why cash balances have reduced despite strong financial performance.

Related terms

• Cash flow
• Cash flow forecast
• Income statement
• Balance sheet
• Working capital
• Cash equivalents
• Liquidity
• Financial statements

Common misconceptions

• A profitable business does not always generate positive cash flow.
• The cash flow statement does not report non-cash accounting adjustments in the same way as the income statement.
• A reduction in cash does not necessarily indicate poor financial performance if funds have been invested for future growth.

Frequently asked questions about cash flow statements

What is a cash flow statement?

A cash flow statement reports the cash received and paid by a business during an accounting period, showing how its cash position has changed over time.

What are the three sections of a cash flow statement?

The statement is divided into operating activities, investing activities and financing activities, each reflecting a different source or use of cash.

Why is the cash flow statement important?

It helps users understand a business’s liquidity, cash generation and ability to meet its financial obligations, providing information that cannot be obtained from profit figures alone.

How is a cash flow statement different from an income statement?

An income statement reports income and expenses to calculate profit, while a cash flow statement reports actual cash movements regardless of when income or expenses are recognised.

Who uses a cash flow statement?

Business owners, management teams, lenders, investors and other stakeholders use the statement to assess liquidity, funding requirements and overall financial resilience.