Given the obsession with cash, it’s not surprising that there is a separate financial statement dedicated to it: the statement of cash‑flows. Many finance professionals consider the statement of cash‑flows a company’s most important financial statement. Rather than focusing on the income statement, which has the problems of noncash expenses and managerial discretion, or a balance sheet, which has the problems of historical cost accounting and conservatism, many people in finance focus on the statement of cash‑flows because it looks purely at cash.
Typically, a statement of cash-flows has three parts: operating, investing, and financing sections. The first section, operating cash‑flows, provides both the next measure of cash and brings together many of the elements that we’ve already discussed.
Operating Cash Flow Equation:
Operating cash flow = Net Profit
+ Depreciation and Amortization
– increase in Accounts Receivable
– increase in Inventory
+ increase in Unearned Revenue
+ increase in Account Payable
More generally, working capital—receivables, inventories, and payables—can have significant cash-flow consequences.
Operating cash flow is distinct from EBITDA in several ways. First and foremost, it considers the costs of working capital, and second, it accounts for tax and interest payments by beginning with net profit. And finally, it includes noncash expenses other than depreciation and amortization, such as share-based compensation, in its final calculation.
What about the rest of the cash-flow statement? Briefly, the investing section of the cash-flow statement emphasizes the ongoing investments that bypass the income statement and go straight into the balance sheet, such as capital expenditures and acquisitions. The financing section examines whether a company has offered debt or paid back debt or issued equity or bought back stock and reveals the cash consequences of doing so.