Meaning and three activities
A statement of cash flows shows how cash and cash equivalents changed during a reporting period. It separates flows by activity and helps explain the connection between opening and closing balances. Operating activity relates to the current business, investing activity to acquiring and selling long-term resources, and financing activity to raising and returning capital.
If a profitable company expands production, its investing cash flow may be negative because it bought equipment. This is not necessarily a warning sign. Conversely, a positive flow from selling key assets may temporarily improve the cash balance while weakening the future business.
Limits and classification
The statement does not replace the balance sheet or the statement of profit or loss. Under the indirect method, operating cash flow is calculated through adjustments to the accounting result; it is not a list of every payment order. Companies should be compared with regard to how interest, dividends and other items are classified in their accounting policies. Related reading: [cash flow statement](/guides/cash-flow-statement/), [profit versus cash](/guides/profit-vs-cash/) and [cash flow](/glossary/denezhnyy-potok/).