Cash Flow Statement: Following the Money

Difficulty: Intermediate

Tags: cash-flow-statement, financial-statements, fundamentals, intermediate

Introduction

Imagine you’re the manager of a lemonade stand. You’ve got a lot of money coming in from sales, but you’ve also got expenses like cups, sugar, and lemons. How do you keep track of all that money? That’s where a cash flow statement comes in. It’s like a report card for your lemonade stand’s finances, showing where your money is coming from and where it’s going. In this article, we’ll explore what a cash flow statement is, why it matters, and how to read one.

What Is It?

A cash flow statement is one of the three main financial statements that companies use to report their financial performance. The other two are the income statement and the balance sheet. The cash flow statement shows the inflows and outflows of cash and cash equivalents over a specific period of time. It’s divided into three main sections:

Operating activities: This section shows the cash flows related to a company’s core business operations, such as cash received from customers and cash paid to suppliers.
Investing activities: This section shows the cash flows related to a company’s investments, such as buying or selling assets.
Financing activities: This section shows the cash flows related to a company’s financing, such as borrowing money or issuing stock.

Why Should Teens Care?

As a teenager, you might not be running a lemonade stand or a big corporation, but you’re probably thinking about your future. You might be wondering how to manage your own finances, or how to invest in the stock market. Understanding cash flow statements can help you make informed decisions about your own money and investments. It’s also an important skill to have if you’re interested in pursuing a career in finance or business.

Key Concepts

Let’s break down some key concepts related to cash flow statements:

Cash inflows: These are the amounts of cash that a company receives from its operations, investments, or financing activities.
Cash outflows: These are the amounts of cash that a company pays out for its operations, investments, or financing activities.
Net change in cash: This is the total change in a company’s cash balance over a specific period of time.

Here’s an example:

Let’s say your lemonade stand has the following cash flows:

Cash inflows: $100 from sales, $50 from a loan from your parents
Cash outflows: $20 for cups, $30 for sugar and lemons
Net change in cash: $100 + $50 - $20 - $30 = $100

This means that your lemonade stand has a net increase in cash of $100.

Real-World Examples

Let’s look at a real-world example of a cash flow statement from a big company like Apple.

In 2020, Apple’s cash flow statement showed:

Operating activities: $122 billion in cash inflows, $44 billion in cash outflows
Investing activities: $12 billion in cash outflows for purchases of property and equipment
Financing activities: $22 billion in cash inflows from issuance of debt

Apple’s net change in cash was $108 billion.

Try It Yourself

Here’s a hands-on activity to help you practice reading a cash flow statement:

Choose a publicly traded company that interests you, such as Tesla or Nike.
Go to the company’s investor relations website and find their latest cash flow statement.
Identify the three main sections of the cash flow statement: operating, investing, and financing activities.
Calculate the net change in cash for the company.

Key Takeaways

Here are the main lessons from this article:

A cash flow statement shows the inflows and outflows of cash and cash equivalents over a specific period of time.
It’s divided into three main sections: operating, investing, and financing activities.
Understanding cash flow statements can help you make informed decisions about your own money and investments.
It’s an important skill to have if you’re interested in pursuing a career in finance or business.

Not financial advice