Financial Modeling and Valuation: A Practical Guide to Investment Banking and Private Equity

CHAPTER 2

The Cash Flow Statement

The cash flow statement is a measure of how much cash a company has produced or spent over a period of time. Although an income statement shows profitability, that profit may or may not result in actual cash gain. This is because many income statement items that are recorded do not necessarily result in an effect on cash. For example, when a sale is made, a customer can pay in cash or on credit. If a company has $10MM in sales, and all customers have paid in cash, then the company has actually generated $10MM in cash. But, if a company has $10MM in sales on credit, then although the revenue has been recorded on the income statement, cash has not been received. The cash flow statement aims to determine how much cash was actually generated, which is broken out into three segments:

• Cash from operating activities
• Cash from investing activities
• Cash from financing activities

The sum of all the cash generated (or spent) from operating activities, from investing activities, and from financing activities results in the total amount of cash spent or received in a given period.

CASH FROM OPERATING ACTIVITIES

Cash from operating activities is a representation of how much cash was generated from net income or profit. We explained earlier how revenue could be received in cash or on credit. As revenue is a source of income, if a portion of that revenue is on credit, we need to make an adjustment to net income based on how much of that revenue is actually ...