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Understanding the Cash Flow Statement

Originally Published: May 2010


The Cash Flow Statement – also referred to as statement of cash flows or funds flow statement – is one of the three financial statements commonly used to gauge a company’s performance and overall health. The other two financial statements -- Balance Sheet and Income Statement -- have been addressed in previous articles.

As the name implies, the Cash Flow Statement provides information about an organization’s cash inflows and outflows over a specified time period. Simply put, it reveals how a company spends its money (cash outflows) and where that money comes from (cash inflows).

The Cash Flow Statement is the best resource for testing a company’s liquidity because it shows changes over time, rather than absolute dollar amounts at a specific point in time. It's also useful in determining the short-term viability of a company.

It's important to note that the Cash Flow Statement reflects a firm’s liquidity. It does not show profitability – the Income Statement does that.