How to Read a Cash Flow Statement: Operating, Investing and Financing Cash

A cash flow statement shows the cash a company took in and paid out in a period, split into operating, investing and financing activities, and why it changed.

It is one of the three main financial statements, beside the income statement and the balance sheet, and it is the one that answers a question the other two cannot: where the money actually went. This page covers why profit and cash differ, the three sections using the cash flow statement in Microsoft's 10-K for the year to June 2026, how the operating section is built from net income, what the statement leaves out, and how Kresmion's Financials tab shows it. It is descriptive throughout.

Why profit and cash differ

The income statement is built on accrual accounting: revenue is recorded when it is earned and costs when they are incurred, whenever the cash moves. A sale on 60-day terms counts as revenue today and brings in cash two months later. A server bought for cash today is expensed bit by bit, as depreciation, over the years it is used.

The cash flow statement undoes that timing. It reports only cash received and paid, sorted into three groups, and its last lines reconcile to the change in cash between two balance sheets. US companies prepare it under the FASB's Topic 230; companies reporting under IFRS use IAS 7, which sets out the same three groups.

• Operating activities: the cash effect of running the business, such as cash from customers and cash paid to suppliers, employees and tax authorities.
• Investing activities: buying and selling long-lived assets and investments, such as property and equipment, other companies and securities.
• Financing activities: dealings with lenders and shareholders, such as borrowing, repaying debt, issuing or buying back shares and paying dividends.

Microsoft's cash flow statement

Microsoft's fiscal year ends on 30 June. Its 10-K for the year ended 30 June 2026, filed on 29 July 2026, prints the cash flow statement on page 53. Condensed here, in millions of dollars, with the working capital lines added together and the smaller financing and investing lines grouped:

Brackets are cash going out. The bottom line ties to the balance sheet: Microsoft's cash and cash equivalents fell from $30,242 million to $20,935 million, a change of $9,307 million, which is 182,935 less 52,546, less 139,500, less 196. Microsoft prints financing before investing; most companies print investing first, and the order does not change the totals.

The fiscal 2025 column also shows that a cash flow statement's earlier years can change. In the 10-K for fiscal 2025, Microsoft printed depreciation, amortization, and other of $34,153 million and net recognized losses of $609 million for that year. The 10-K for fiscal 2026 shows $29,433 million and $5,329 million for the same year. Note 1 says Microsoft recast certain prior period amounts in its cash flow statements to match the current presentation, with no impact on net cash from operations, and both versions do add up to $136,162 million.

The operating section, built from net income

Microsoft, like most companies, presents operating cash flow with the indirect method: it starts from net income and adjusts it, line by line, to cash. Both standards also allow, and encourage, the direct method, which lists cash received from customers and paid to suppliers and staff. Reading the adjustments is reading the gap between profit and cash.

• Non-cash charges are added back. Depreciation and amortization reduce profit but use no cash in the year; the cash went out when the asset was bought. Stock-based compensation, $12,405 million at Microsoft, is an expense paid in shares rather than cash.
• Gains are taken out. Microsoft's net gains on investments and derivatives raised pre-tax income by $11,047 million. Some were never received in cash, and where an investment was sold, the whole sale proceeds are reported in investing. Either way the gain does not belong in operating cash, so it is subtracted.
• Deferred taxes are tax expense recorded now but payable later, or the reverse. Microsoft added back $14,189 million in fiscal 2026.
• Working capital moves cash both ways. A rise in receivables means sales were booked but not yet collected, a use of cash: Microsoft's receivables line was $12,737 million negative. A rise in unearned revenue means customers paid or were billed ahead, and once collected it is a source of cash: $9,361 million positive. The nine working capital lines net to $4,895 million negative.

The result: $182,935 million of operating cash against $133,749 million of net income, 1.37 times. Operating cash flow runs above net income when non-cash charges such as depreciation and stock-based pay are large. When the gap runs the other way for several years, reported profit is not turning into cash, and the working capital lines usually show why.

Investing and financing

Investing at Microsoft is dominated by one line. Additions to property and equipment, the capital spending on datacenters, servers and buildings, were $115,948 million, 79.6% more than the year before. Purchases of securities, $58,351 million, were nearly offset by $34,605 million of maturities and $21,798 million of sales; most of the remaining outflow is $19,861 million of other investing, whose $22.2 billion increase Microsoft's discussion of cash flows ties primarily to facilitating the purchase of components.

Financing shows what went back to shareholders and lenders: $22,271 million of share repurchases, $26,445 million of dividends paid and $3,000 million of debt repaid. The dividend figure is the cash paid in the year. The statement of stockholders' equity shows $27,034 million of dividends declared, and the difference is timing: each June dividend is paid after the fiscal year ends, so the one declared on 10 June 2026 is payable on 10 September 2026.

Operating cash less capital spending is the most quoted figure derived from this statement, free cash flow: $182,935 million less $115,948 million is $66,987 million for Microsoft in fiscal 2026, lower than the $71,611 million of fiscal 2025. Operating cash rose by a third over the same year. It is not a line on the statement, and companies define it in different ways.

Non-cash items and where interest sits

• Non-cash investing and financing. Assets acquired without paying cash in the period do not appear in the three sections. Microsoft's leases note records $24,608 million of right-of-use assets obtained in exchange for new finance lease obligations in fiscal 2026, and Note 6 says $26.7 billion of property and equipment purchases were still in accounts payable at year end. Both are disclosed in the notes.
• Where interest sits depends on the standard. Under US GAAP, interest paid is an operating cash flow, except interest capitalized into the cost of an asset, and dividends paid are financing. IAS 7 has let IFRS reporters choose among sections for interest and dividends, so operating cash flow can differ between two otherwise similar companies for that reason alone. Amendments that come with IFRS 18, for annual periods from 1 January 2027, set new requirements for classifying them.

The cash flow statement in Kresmion's Financials tab

On a company's page in Kresmion's app, open with a free account, the Financials tab shows the cash flow statement by fiscal year or quarter, built from the XBRL data in the company's SEC filings. A toggle switches between two views.

Standard carries the lines that compare across companies: operating cash flow, capital expenditure, share repurchases and dividends paid, plus a calculated free cash flow row, operating cash flow less capital expenditure. Capital expenditure is shown as a positive amount and subtracted. The Standard view does not carry the investing and financing totals or a depreciation line. For Microsoft in fiscal 2026 it shows $182,935 million, $115,948 million, $22,271 million, $26,445 million and $66,987 million.

As reported keeps the filer's own lines, labels, order and signs as printed, including Microsoft's depreciation, amortization, and other. It is built from the SEC's Financial Statement Data Sets and from the XBRL of newly filed reports, a different route from the Standard view, so the most recent filing can reach one view before the other.

Quarterly cash flows need one extra step. Many 10-Q cash flow statements cover only the year to date. Where a filer gives no three-month figure, Kresmion's quarterly view calculates the second and third quarters as this year-to-date figure less the previous one, and the fourth quarter as the full year less the first nine months, and marks each calculated cell as derived. In Kresmion's spreadsheet, =KRM.FIN("MSFT","ocf","FY2026") returns operating cash flow in a cell; the guide lists the other lines it accepts.

What the cash flow statement cannot tell you

• A single year is a thin sample. Capital spending is lumpy, so one heavy year of investment can make operating cash less capex look weak beside the years around it.
• Capex is one number. The investing line does not say how much went to replacing worn equipment and how much to new capacity.
• It does not explain quality. A jump in operating cash can come from collecting receivables faster or from paying suppliers later, for example through a supplier finance program in which a bank pays the supplier and the company repays the bank on longer terms. Neither can repeat forever, and the working capital lines show which happened.
• Earlier years can be recast. As Microsoft's fiscal 2025 lines show, a later filing can move amounts between lines, so a comparison should use the most recent version of each year.

Key takeaways

Frequently asked questions

What are the three sections of a cash flow statement?

Operating activities cover the cash effect of running the business. Investing activities cover buying and selling long-lived assets, other companies and securities. Financing activities cover borrowing and repaying debt, issuing and buying back shares, and paying dividends.

Why is operating cash flow different from net income?

Net income is built on accrual accounting and includes non-cash items such as depreciation, stock-based compensation, deferred taxes and investment gains. Operating cash flow removes those and adds the cash effect of changes in receivables, payables, inventory and unearned revenue.

What is the difference between the direct and indirect method?

The direct method lists the main cash receipts and payments, such as cash from customers and cash paid to suppliers. The indirect method starts from net income and adjusts it to cash. Both reach the same operating cash flow, and most companies use the indirect method.

Can a profitable company run out of cash?

Yes. A company can report profit while its cash is tied up in unpaid receivables, inventory or heavy capital spending, or while it repays debt. The cash flow statement shows where the cash went in such a period.

Does strong operating cash flow mean the share price will rise?

No. The statement records what happened in a past period. It does not forecast the share price, and operating cash flow can rise for reasons that do not repeat, such as faster collection of receivables.

This page is information, not investment advice.

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Source: Microsoft Corporation, Form 10-K for the fiscal year ended 30 June 2026, filed 29 July 2026: Item 8 cash flows statements (page 53), stockholders' equity statements, Note 1 (recast of prior period cash flow amounts), Note 6 property and equipment, Note 13 leases and Note 15 stockholders' equity (dividend dates), https://www.sec.gov/Archives/edgar/data/789019/000119312526323660/msft-20260630.htm ; Microsoft Corporation, Form 10-K for the fiscal year ended 30 June 2025, cash flows statements, https://www.sec.gov/Archives/edgar/data/789019/000095017025100235/msft-20250630.htm ; IFRS Foundation, IAS 7 Statement of Cash Flows, https://www.ifrs.org/issued-standards/list-of-standards/ias-7-statement-of-cash-flows/ ; IFRS Foundation, IFRS 18 Presentation and Disclosure in Financial Statements, https://www.ifrs.org/issued-standards/list-of-standards/ifrs-18-presentation-and-disclosure-in-financial-statements/ ; FASB Accounting Standards Codification Topic 230, Statement of Cash Flows ; subtotals and ratios computed by Kresmion from the 10-K figures ; Kresmion Financials tab (Standard and As reported views) and the KRM.FIN spreadsheet function.

Kresmion Research.