Cash Flow Statement

Introduction

The cash flow statement is the statement of cash that shows the frequency status of inflow cash and outflow cash. The statement of cash flows summarizes a company's operating, investing, and financing activities for the period. Each of these categories can result in a net inflow or a net outflow of cash. 

Importance of Cash Flow Statement

There are various importance of cash flow statement some of them are listed as bellows:

• To know the operating cash position of the business: It includes various operating activities like collection of customers, payment to suppliers, payment for operating expenses and tax expenses.
  

• To know the investing cash position of the business: It includes all the activities related to purchase and sales of fixed assets. It deals with transactions with tangibles assets.
  

• To know the financing cash position of the business: It includes all the activities related to financing such as equity financing, debt financing and its charges expenses like dividend, and interest expenses.
  

• To know cash & cash equivalent position of the business: It includes physical cash in the forms of notes and coins plus digital cash along with various marketable securities includes both money market instruments and capital market instruments. The money market instruments include T-Bills, Commercial Papers, Bills of Exchanges etc. while capital market instrument includes stocks and bond or debentures.
  

Methods of Cash Flow Statement

It has two method to prepare the Cash Flow Statement

1. Direct Method:  This method considers all the cash inflows and outflows of the company throughout all the three activities of the company.
   

2. Indirect Method: This method considers net income, added and subtracted non-cash expenses or incomes back to net income to calculate operating activities while other two activities of the company are same as direct method.
   

Process of Cash Flow Statement 

How to prepare Cash Flow Statement under Direct Method?

The cash flow statement can be prepared by following steps as listed below:

1. Cash Flows from Operating Activities: Under this activities there are mainly three major category that are analyzed to get the total value of Operating activities. 

• Cash collection from Customers: It is related to Sales and Debtors

• Cash payment to Suppliers: It is related to Purchase and Creditors

• Cash paid to Operating Expenses: It is related to Direct and Indirect expenses except Tax Expenses

• Cash paid to Tax Expenses: It is generally kept separately under the heading name Cash Flows Before Tax expenses.

2. Cash Flows from Investing Activities: It is related to purchase and sales of fixed assets items.

3. Cash Flows from Financing Activities: It is related to fund management either by borrowing or paying.

4. Net Changes in Cash Flows (1+2+3)

5. Add: Opening Cash and Cash Equivalent

6. Closing Cash and Cash Equivalent

How to prepare Cash Flow Statement under Indirect Method?

The cash flow statement can be prepared by following steps as listed below:

1. Cash Flows from Operating Activities: Under this activities there are mainly three major category that are analyzed to get the total value of Operating activities. 

• Net Profit Before Tax and Extraordinary Income

• Operating Profit Before Working Capital Changes: It is related to Current Assets and Current Liabilities

• Cash Generated from Operating Activities

2. Cash Flows from Investing Activities: It is related to purchase and sales of fixed assets items.

3. Cash Flows from Financing Activities: It is related to fund management either by borrowing or paying.

4. Net Changes in Cash Flows (1+2+3)

5. Add: Opening Cash and Cash Equivalent

6. Closing Cash and Cash Equivalent

Format of Cash Flow Statement

 

Note: Net Profit and Closing Cash Balance are different two things. It is not necessary that if you have $ amount of profit then you'll have same or any positive $ cash balance. Cash balance is affected by three activities of operating, investing and financing activities. While net profit is derived from sales revenue after adjusting operating expenses and losses, operating incomes and gains and tax expenses.

Activities for Preparing Cash Flow Statement

To prepare the cash flow statement, it is essential to prepare the cash budget (also known as cash receipt and disbursement budget). The cash budget is an estimation of cash inflows and cash outflows for a specific period of time. It could be prepared for monthly or yearly cash budget. It gives an idea about the level of cash sufficiency to determine whether the business is operating or not in a given time frame.

Conclusion

The cash flow statement is the statement of cash that shows the frequency status of inflow cash and outflow cash. The statement of cash flows summarizes a company's operating, investing, and financing activities for the period. Net Profit and Closing Cash Balance are different two things that are affected by number of factors. Cash budget is essential to prepare the cash flow statement. It gives an idea about future cash inflows and outflows.

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