Cash flow statement also known as the statement of cash flows is a record of the amount of cash and cash equivalents
that flow in and out of a company during a specific period of time. Cash
includes currency, checks, cash on hand and deposits in the bank. Cash equivalents are short-term temporary investments such as treasury bills, certificates of deposit CDs or commercial paper that can be quickly and easily converted to cash.
Cash flow statement is very important because cash is the lifeblood of the business and the cash flow statement helps you understand where money is coming and where it is being spent. It also alerts you, when a cash flow problem may be coming. The cash flow statement is one of the four main financial statements which are balance sheet
, income statement
, cash flow statement and statement of shareholders equity. A cash flow statement tells how much cash is generated by a company. It shows changes over time usually on a month by month basis rather than showing an absolute dollar amount at a point in time. It uses and recorders the information from a company’s balance sheet and income statement. Generally, the cash flow statement is broken down into three sections;
→ Cash flows from operating activities
→ Cash flows from investing activities
→ Cash flows from financing activities
Let’s look at each in terms of cash receipts considered as cash in and cash payments as cash out.
Cash flows from operating activities reflect how much cash is generated from selling company’s products or services. Cash receipts include the sale of goods or services as well as income from items such as interest and dividends, while interest or dividends could be considered financing activities. The Financial Accounting Standards Board (FASB) classified them as operating activities. Operating activities also include cash payments such as inventory, payroll, taxes, interest, utilities, and rent.
Under IAS 7, operating cash flows include:
- Receipts for the sale of loans, debt or equity instruments in a trading portfolio
- Interest received on loans
- Payments to suppliers for goods and services
- Payments to employees or on behalf of employees
- Interest payments (alternatively, this can be reported under financing activities in IAS 7)
- buying Merchandise
Investing activities report the purchase and sale of long-term assets such as property, plant, and equipment as well as investment securities. These investments are typically not part of everyday operations of selling of goods or services.
Examples of Investing activities are
- Purchase or Sale of an asset (assets can be land, building, equipment, marketable securities, etc.)
- Loans made to suppliers or received from customers
- Payments related to mergers and acquisition.
Financing activities report the issuance and repurchase of the company’s own bonds and stock and the payment of dividends. Under IAS 7,
- Payments of dividends
- Payments for repurchase of company shares
- For non-profit organizations, receipts of donor-restricted cash that is limited to long-term purposes
Disclosure of non-cash activities
Under IAS 7, non-cash investing and financing activities are disclosed in footnotes to the financial statements. Under US General Accepted Accounting Principles (GAAP), non-cash activities may be disclosed in a footnote or within the cash flow statement itself. Non-cash financing activities may include
- Leasing to purchase an asset
- Converting debt to equity
- Exchanging non-cash assets or liabilities for other non-cash assets or liabilities
- Issuing share
- Payment of dividend taxes in exchange for assets
Cash Flow Statement Example
Here is a simplified sample showing the three different sections previously discussed. Cash flow from operations with additions to cash and subtractions from cash. Cash flow from investing and cash flow from financing.
Continue reading to learn about how to prepare cash flow statement using a direct and indirect method