The operating activities section starts with net income from the income statement and adjusts for non-cash items and changes in working capital. This includes:

• Net Income: The starting point, taken directly from the income statement.
• Adjustments for Non-Cash Items: Adding back non-cash expenses like depreciation and amortization.
• Changes in Working Capital: Adjustments for changes in accounts like receivables, inventory, and payables.

This section highlights the cash-generating ability of core business activities.

The investing activities section shows the cash used for and generated from investments in long-term assets. This includes:

• Purchase of Property and Equipment: Cash spent on acquiring physical assets.
• Sale of PP&E: Cash received from selling physical assets.
• Investments in Securities: Cash used to buy investment securities.
• Proceeds from Sale of Securities: Cash received from selling investment securities.

This section helps understand how cash is being allocated for future growth and asset management.

The financing activities section details cash flows related to funding the business through debt and equity. This includes:

• Issuance of Equity: Cash received from issuing stock.
• Repayment of Debt: Cash used to pay off loans or bonds.
• Distributions Paid: Cash paid out to shareholders.
• Proceeds from Borrowing: Cash received from loans or bonds.

This section offers insight into how the business is financed and manages its capital structure.

The statement of cash flows is essential for managing liquidity, planning for future cash needs, and ensuring financial obligations are met. By analyzing this statement, businesses can anticipate cash flow trends, identify potential shortfalls, and make informed decisions about operations, investments, and financing.

At Know Your Numbers Accounting, we guide small business owners through the intricacies of their statement of cash flows, helping them understand their cash dynamics and maintain financial health.