What is the statement of Cash flow and how it’s being utilized?
The statement of cash flow is a mandatory part of the financial statement along with the balance sheet and income statement since 1987. This financial report complements the income statement and balance sheet by summarizing the types and the amounts of cash activities in the company. This report is often unitized as a measure to how well a company manages its cash position, which reflects a company’s profitability and management to a certain extent. For Investors, the Statement of cash flow demonstrates a company’s operation and expense to determine the financial footing of a company. For creditors, the Statement of cash flow is utilized to determine the ability to pay its debt. For the company itself, the statement of cash flow is utilized for future budgeting.
A cash flow statement, also known as the statement of cash flows, is a financial statement that shows the flow of cash into and out of your business during a specific period of time. This report shows how much cash a company receives and spends on operating, investing, and financing activities. The statement of cash flows is one of the core financial statements, along with the income statement and balance sheet, used to evaluate a business’s financial health.
Cash Flow Statement Format
With this overview in mind, let’s break down what a cash flow statement looks like and what you should expect to include when creating one for your business.
As we’ve mentioned, the statement of cash flows is basically a snapshot of your business’s financial health. This being said, the cash flow statement can be presented in two formats:
Indirect format: The starting point of an indirect cash flow statement is the net income from your income statement, and then because an income statement is prepared on an accrual basis, you make adjustments for depreciation, accounts receivable, inventory, accounts payable, and accrued expenses to arrive at your cash flow from operating activities.
Direct format: Rather than starting with net income, a direct cash flow statement lists all of the different types of cash amounts received from customers as well as those paid to employees and vendors.
Ultimately, whichever presentation method you use, the end result should be the same. This being said, the cash flow statement format you choose is up to you—most businesses use the indirect method, the International Accounting Standards Board (IASB), however, recommends the direct method.
Understand the structure of the statement of cash flow
The main component of the statement of cash flow are:
1. Cash From Operating Activities
2. Cash From Investing Activities
3. Cash From Financing Activities
Cash From Operating Activities:
This section of the report includes all of the cash activities from the operation of a company, it displays how much cash is generated from a company’s products/services and how much cash is spent during the process. The changes in cash, accounts receivable, depreciation, inventory and account payable are reflected in the cash from operation. It covers your day-to-day business income and expenses, such as income from sales and paid receivables. Outflows can include payroll, payments to suppliers, insurance, and business tax.
Cash From Investing Activities
This section of the report includes any source and uses of cash for investment in a company. The changes in equipment, assets or investments are reflected in the investing component.
Investment outflow covers bigger-ticket items like the purchase of equipment or real estate. These are sources and uses of cash from long-term investments of assets in your company, rather than daily purchases like supplies or goods for resale. For example, if you rent out or sell equipment or real estate assets, those proceeds count as investment inflow in your cash flow analysis.
Cash From Financing Activities
This section if the financial report included the so The changes in Debt, Loans or dividends are reflected in the financing section. In this category, you’ll track incoming capital from equity fundraising or business loans as inflow. Any payments you make on a loan during the reporting period or dividends paid to investors will count as outflows in this category.
How to calculate cash flow
To calculate cash flow, the net income needed to be adjusted by adding or subtracting the differences in revenue, expenses and credit transactions. For noncash items, they need to be adjusted and reevaluated for operation.
Cash from operating activities +(-) Cash from investing activities +(-) Cash from financing activities + Beginning cash balance = Ending cash balance
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Statement of Cash Flows