CFS Overview

The Cash Flow Statement (CFS) shows where a company's cash actually came from and where it went during a period. This section breaks into three lessons -- one for each section of the CFS:

1. Cash from Operations (CFO) -- how the core business generates (or burns) cash, starting from net income and adjusting for non-cash items and working capital changes.
2. Cash from Investing (CFI) -- cash spent on or received from long-term assets like PP&E, acquisitions, and investment securities.
3. Cash from Financing (CFF) -- cash flows between the company and its capital providers: debt issuances and repayments, equity raises, dividends, and buybacks.

Each lesson covers the key line items, the logic behind them, and the interview questions that test them.

Why Cash Flow Matters

The income statement uses accrual accounting -- revenue is recognized when earned, not when cash arrives. A company can book millions in revenue while its bank account drains. The CFS strips away that accounting judgment and reconciles accrual profits to the actual cash impact.

The Three Sections

Every cash flow statement breaks into three buckets:

The sum of all three equals the net change in cash for the period, which gets added to beginning cash to arrive at ending cash -- tying directly to the balance sheet.

Which Statement Best Assesses Company Health?

If you could only look at one financial statement to assess a company's health, pick the CFS. Cash is harder to manipulate than earnings. Management has wide latitude over revenue recognition, depreciation schedules, and reserve estimates -- all of which shape net income. But cash either moved or it didn't.

A company reporting strong net income but weak or negative operating cash flow is a red flag. The CFS reveals whether earnings are backed by real cash generation or propped up by aggressive accounting choices.

Direct vs. Indirect Method

There are two ways to present CFO:

• Direct method -- lists actual cash receipts and payments (cash collected from customers, cash paid to suppliers, etc.). Conceptually simple but rarely used because it requires detailed cash tracking.
• Indirect method -- starts with net income and adjusts for non-cash items and working capital changes. This is what ~95% of companies use in their filings, and it's what you'll see in every interview and modeling test.

The indirect method is your default. Learn it cold. The direct method is worth knowing exists, but don't lose sleep over it.

How the CFS Connects to the Other Statements

The CFS is the bridge between the income statement and the balance sheet:

• Net income flows from the income statement into the top of CFO
• Depreciation on the CFS connects to PP&E on the balance sheet
• Working capital changes on the CFS reflect balance sheet movements in current assets and liabilities
• Ending cash on the CFS ties to the cash line on the balance sheet

You can derive the entire CFS from the income statement and two balance sheets (beginning and ending). Every adjustment in the indirect method corresponds to a balance sheet change -- if you know the IS and both balance sheets, you have the data to build the CFS from scratch.

Key Takeaways

• The CFS shows actual cash movement -- harder to manipulate than net income
• If you could pick only one statement to assess company health, pick the CFS
• Three sections: CFO (core business), CFI (long-term assets), CFF (debt and equity)
• The indirect method starts with net income and adjusts -- this is the standard (~95% of companies)
• You can derive the CFS from the income statement and two balance sheets
• $\text{Beginning Cash}+\text{CFO}+\text{CFI}+\text{CFF}=\text{Ending Cash}$, tying to the balance sheet