Just like you need to drink water to live, businesses need cash flows to exist. Whether from customers or investors, an adequate supply of cash flows ensures that a company will be able to buy and sell goods at a profit, and that it can fully serve customers according to its mission.

1. It has three sections

2. It can present operating activities two ways

The indirect method is required of all companies. This method starts with net income, adding and subtracting reconciling items in order to wind up with net cash flows received from (or paid for) operating activities.

3. It is the newest financial statement

Of the four required financial statements, the cash flows statement is the most recently required statement. It was established by the Financial Accounting Standards Board in 1987.

4. It ignores the accrual method

Accrual accounting forms the foundation for the income statement. It requires recording revenues when earned and matches expenses to revenues. The statement of cash flows ignores all this, focusing on just cash. When cash is received, that’s a cash inflow. When it is paid, that’s a cash outflow.

5. It’s similar to the income statement

The operating activities section of the cash flows statement, under the optional direct method, is quite similar to the income statement.

6. It explains the balance sheet

7. It reconciles cash

All of the cash inflows and cash outflows listed in the statement of cash flows, when netted together, should equal the net change in cash as shown on the balance sheet. This is called financial statement articulation .

8. It sometimes warns investors of poor quality earnings

If a company has more net income than net cash flows from operations, then watch out! This red flag may indicate that the company’s earnings are of poor quality and are unsustainable. Worse yet, the company may be resorting to accounting tricks to inflate its income.

9. It uses cash equivalents

In practice, companies don’t exactly use cash all of the time. They write checks from money market and other investment accounts. They also park cash into highly liquid investments than can be easily sold. The cash flows statement does not discriminate against these kinds of instruments. Instead, it combines all different kinds of cash and cash equivalents into a single total value.

10. It provides information about noncash investing and financing activities