How to Read a Cash Flow Statement

The Three Sections of Cash Flow 

At Momus Partners, Jonah walks Xue through the structure of the cash flow statement. “Think of it in three streams,” he says:  

• Operating activities: cash generated by the core business
• Investing activities: cash spent on equipment and acquisitions or received from selling assets
• Financing activities: cash from borrowing, repaying debt, or issuing shares

“Together, they show where cash comes from and where it goes.”  

Xue sees this as the bridge between the income statement and the balance sheet.

Operating Cash Flow: The Core Engine 

Operating cash flow starts with net income and adjusts for non-cash items like depreciation, plus changes in working capital. It shows whether the firm can fund itself day to day. 

• Depreciation is added back because it reduces profit, but not cash
• Rising inventory uses cash — money spent to replenish stock
• Rising receivables uses cash — sales recorded, but customers haven’t paid yet
• Rising payables frees up cash — the firm hasn’t paid the bills yet, so cash stays in the business longer