[ecis2016.org] The cash flow statement is a financial report that outlines the flow of funds and financial equivalents that enter and leave a business.
Cash flow statements (CFS) are one of the three basic financial statements used by business owners. Cash flow statements, together with income and balance sheets, represent critical financial information that affects organisational decision-making. While all three are useful in assessing a business’s finances, numerous business professionals believe cash flow statements are most essential.
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The cash flow statement is a financial report that outlines the flow of funds and financial equivalents that enter and leave a business. The CFS assesses a business’s ability to handle its cash position or how successfully it generates cash to meet debt commitments and support operating expenses.
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Cash flow statement: Structure
The following are the primary components of the cash flow statement:
- Cash flow generated by operating activities
- Cash flow generated by investing activities
- Cash flow generated by financing activities
Cash generated by operating activities
Any sources and expenditures of funds from business activities are included in the CFS’s operating expenses. In other words, it indicates the amount of money earned by a business’s products or services. Cash from operations generally reflects changes in income, accounts receivable, taxes, inventory, and accounts payable.
Among these operational actions could be:
- Revenue from the sale of products and services
- Payments of interest
- Payments of income taxes
- Payments made to providers of products and services utilised in the manufacturing process
- Employee wage payments
- Rent payments
- Other types of operating costs
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Receipts from the transfer of loans, debt, or equities are included in the instance of a trading portfolio or an investment group.
Cash generated by investing activities
Investing operations encompass all sources and usage of cash generated by a business’s investments. This category includes asset sales and purchases, loans paid to suppliers or received from clients, and payments associated with mergers and acquisitions (M&A). In a nutshell, improvements in equipment, resources, or investments are related to cash from investments.
Because cash is used to purchase new machinery, offices, or short-term assets such as marketable securities, changes in cash from investment are normally termed cash-out items. However, when a firm sells an asset, the trade is treated as cash-in when computing cash from investing.
Cash generated by financing activities
Funds from financing activities comprises capital from investors and banks and how cash is distributed to shareholders. These funds comprise dividends, repayments for stock repurchases, and principal debt repayment (loans) made by the business.
When capital is raised, cash is brought in, and cash is sent out when dividends are paid. As a result, whenever a corporation offers a bond to the public, it receives cash financing. However, when interest is charged to shareholders, the company’s cash is depleted. Remember that while interest is a cash-out item, it is presented as an operating activity rather than a financing activity.
Cash Flow: Calculation
The direct approach and the indirect method are used to calculate cash flow.
Direct cash flow method
The direct method totals all cash payments and revenues, including money paid to suppliers, income received from consumers, and salary payments. This CFS method is simpler for very small enterprises that employ cash-based accounting.
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These figures can also be obtained by studying the net drop or rise in various asset and liability accounts’ beginning and ending balances. It is presented clearly.
Here’s a cash flow statement format through the direct method:
| Cash flow from Operating activities | Amount (in Rs) | Amount (in Rs) |
| Add: Operating cash receipts: (A) | ||
| Cash sales | ||
| Cash received from customers | ||
| Trading commission received | ||
| Royalties received | ||
| Less: Operating cash payments: (B) | ||
| Cash purchase | ||
| Cash paid to suppliers | ||
| Cash paid for business expenses | ||
| Cash generated from operations (A-B) = (C) | ||
| Less: Income tax paid (Net of tax refund received) (D) | ||
| Cash flow before extraordinary items (C-D) = (E) | ||
| Adjusted extraordinary items (+/-) (F) | ||
| Net cash flow from operating activities (E-F) = (G) | ||
| Cash flow from investing activities (calculation same as under indirect method) (H) | ||
| Cash flow from financing activities (calculation same as under indirect method) (I) | ||
| Net increase in cash and cash equivalents (G+H+I) = (J) | ||
| Cash and cash equivalents and the beginning of the period (K) | ||
| Cash and cash equivalents and the end of the period (J+K) |
Indirect cash flow method
This technique calculates cash flow by altering gross income by adding or removing differences from non-cash transactions. Non-cash items appear on the balance sheet as changes in a business’s assets and liabilities from one term to the next. As a result, the accountant will identify any changes to asset and liability records that must be added back to or subtracted from the total revenue figure to calculate an exact cash inflow or outflow.
| Cash flow from Operating activities (indirect method) | Amount (in Rs) | Amount (in Rs) |
| Net profit before Tax and extraordinary Items | ||
| Cash flow from Operating activities | ||
| Add: Non-cash and non-operating Items which have already been debited to profit and Loss Account like: | ||
| Depreciation | ||
| Amortisation of intangible assets | ||
| Loss on the sale of Fixed assets | ||
| Loss on the sale of Long-term Investments | ||
| Provision for tax | ||
| Dividend paid | ||
| Less: Non-cash and Non-operating Items which have already been credited to Profit and Loss Account like | ||
| Profit on sale of fixed assets | ||
| Profit on sale of Long term investment | ||
| Operating profit before working Capital changes (A) | ||
| Changes in working capital: | ||
| Add: Increase in current liabilities | ||
| Decrease in current assets | ||
| Less: Increase in current assets | ||
| Decrease in current liabilities | ||
| Net increase / decrease in working capital (B) | ||
| Cash generated from operations (C) = (A+B) | ||
| Less: Income tax paid (Net tax refund received) (D) | ||
| Cash flow from before extraordinary items (C-D) = (E) | ||
| Adjusted extraordinary items (+/) (F) | ||
| Net cash flow from operating activities (E+F) = (G) | ||
| Cash flow from Investing activities | ||
| Proceeds from sale of fixed assets | ||
| Proceeds from sale of investments | ||
| Purchase of shares/debentures/fixed assets | ||
| Net cash from investing activities (H) | ||
| Cash flow from Financing activities | ||
| Proceeds from issue of shares | ||
| Proceeds from issue of debentures | ||
| Payment of dividend | ||
| Net cash flow from financing activities (I) | ||
| Net increase in cash and cash equivalents (G+H+I) = (J) | ||
| Cash and cash equivalents and the beginning of the period (K) | ||
| Cash and cash equivalents and the end of the period (J+K) |
Cash flow: Limitations
- Negative cash flow raises a red flag, which doesn’t always mean that the company is in trouble.
- Cash flow statement, individually, doesn’t give accurate data about a company’s financials.
Differences among cash flow, income statement and balance sheet
Cash flow statement measures the performance of a company over a period. It is a true measure of cash inflows and outflows.
The income statement is an allocation of the cost of an asset over a period of time.
For the balance sheet, the net cash flow from the cash flow statement should equal the change in various items in the balance sheet.
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