Glossary
Cash flow statement
The financial statement that reconciles net income to the actual change in cash through operating, investing and financing activities.
On this page
The cash flow statement is one of the three core financial statements, alongside the income statement and the balance sheet. It shows where a company's cash came from and where it went during a period, sorted into operating, investing and financing activities, and ends with the change in the cash balance. Because it tracks real money rather than accounting estimates, it is often the best place to test whether reported profits are backed by cash.
How it is built
Nearly all US public companies use the indirect method for the operating section. It starts with net income and adjusts for items that affected profit but not cash:
- Add back non-cash expenses such as depreciation, amortization and stock-based compensation.
- Adjust for working capital changes. A rise in receivables or inventory uses cash (subtract); a rise in accounts payable conserves cash (add).
The investing section then lists capital expenditures, acquisitions and purchases or sales of securities. The financing section shows borrowing and repayments, share issuance, buybacks and dividends.
What to look for
- Operating cash flow consistently above net income usually signals solid earnings quality; the reverse deserves investigation.
- Capex compared with depreciation shows how hard the company is reinvesting.
- Free cash flow (operating cash flow minus capex) shows what is truly available to owners.
- The financing section reveals whether dividends and buybacks are funded by the business or by new debt.
Large add-backs for stock-based compensation make operating cash flow look stronger, but that compensation is still a real cost, paid in shares instead of cash, which dilutes existing owners.