1. http://arborinvestmentplanner.com/cash-flow-statement-
analysis-purpose-components-and-format/
Cash Flow Statement Analysis: Purpose,
Components, and Format
by KenFaulkenberry
in Investment Analysis
Purpose of Cash Flow Statement Analysis
The purpose of cash flow statement analysis is to attain details of cash inflows and
outflows. It is one of three required financial statements of public entities. The other two
are the balance sheet and the income statement.
Purpose of Cash Flow Statement Analysis
The purpose of the cash flow statement is to show where an entities cash is being
generated (cash inflows), and where its cash is being spent (cash outflows), over a
specific period of time (usually quarterly and annually). It is important for analyzing the
liquidity and long term solvency of a company.
The cash flow statement uses cash basis accounting instead of accrual basis accounting
which is used for the balance sheet and income statement by most companies. This is
important because a company may accrue accounting revenues but may not actually

2. receive the cash. This could produce profits and taxes payable but not provide the
resources to stay solvent.
Related Reading: Types of Cash Flow & Cash Flow Calculations Guide
Cash Flow Statement Components
The cash flow statement components provide a detailed view of cash flow from
operations, investing, and financing:
Cash Flow from Operating Activities
The net amount of cash coming in or leaving from the day to day business operations of
an entity is called Cash Flow From Operations. Basically it is the operating income plus
non-cash items such as depreciation added. Since accounting profits are reduced by
non-cash items (i.e. depreciation and amortization) they must be added back to
accounting profits to calculate cash flow.
Cash flow from operations is an important measurement because it tells the analyst
about the viability of an entities current business plan and operations. In the long run,
cash flow from operations must be cash inflows in order for an entity to be solvent and
provide for the normal outflows from investing and finance activities.
Cash Flow From Investing Activities
Cash flow from investing activities would include the outflow of cash for long term
assets such as land, buildings, equipment, etc., and the inflows from the sale of assets,
businesses, securities, etc. Most cash flow investing activities are cash out flows because
most entities make long term investments for operations and future growth.
Cash Flow From Finance Activities
Cash flow from finance activities is the cash out flow to the entities investors (i.e.
interest to bondholders) and shareholders (i.e. dividends and stock buybacks) and cash
inflows from sales of bonds or issuance of stock equity. Most cash flow finance activities
are cash outflows since most entities only issue bonds and stocks occasionally.
Cash Flow Statement Format
Operating Activities:
Net Income
+ Depreciation and Amortization
+/- One Time Adjustments (i.e. investment gains or losses not related to operations,
deferred taxes, stock compensation)
+/- Changes in Working Capital
= Cash Flow From Operations
Investing Activities:
+/- Net Capital Expenditures
+/- Net Investments
= Cash Flow from Investing Activities
Financing Activities
– dividends

3. +/- sale or purchase of company stock
+/- net borrowings
= Cash Flow from Financing Activities
Summary of Cash Flow Activities:
+/- Cash Flow From Operating Activities
+/- Cash Flow From Investing Activities
+/- Cash Flow From Financing Activities
= Net Change in Cash
+ Beginning Cash Balance
= Ending Cash Balance
Note: You should be able to reconcile the Net Change in Cash with the cash balances
reported on the Balance Sheet.
Investment Analysis Summary
The cash inflows and cash outflows in the cash flow statement are segmented into cash
flow from operations, investing, and financing. These details provide insight in the
liquidity and solvency, as well the entities ability to meet future needs for capital and
growth.
Related Reading: Investment Analysis: High Probability Strategies
Written by KenFaulkenberry
AAAMP Blog by Ken Faulkenberry
Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of
Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated
to helping people with self-directed investment management through the Arbor Investment Planner. His
asset allocation strategies have an outstanding performance record.
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Tagged as: financial statements, investment analysis, stocks