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What is Statement of Cashflow?
A statement of cash flows is a financial statement which summarizes cash transactions of a business during a given accounting period and classifies them under three heads, namely, cash flows from operating, investing and financing activities. It shows how cash moved during the period by indicating whether a particular line item is a cash in-flow or a cash out-flow. The term cash as used in the statement of cash flows refers to both cash and cash equivalents. Cash flow statement provides relevant information in assessing a company's liquidity, quality of earnings and solvency.What are the Activities?
As stated above, a statement of cash flows comprises of three sections:
- Cash Flows from Operating ActivitiesThis section includes cash flows from the principal revenue generation activities such as sale and purchase of goods and services. Cash flows from operating activities can be computed using two methods. One is the Direct Method and the other Indirect Method.
- Cash Flows from Investing ActivitiesCash flows from investing activities are cash in-flows and out-flows related to activities that are intended to generate income and cash flows in future. This includes cash in-flows and out-flows from sale and purchase oflong-term assets.
- Cash Flows from Financing ActivitiesCash flows from financing activities are the cash flows related to transactions with stockholders and creditors such as issuance of share capital, purchase of treasury stock, dividend payments etc.
Format and Example
Following is a cash flow statement prepared using indirect method:
| Company A, Inc. | ||
| Cash Flow Statement | ||
| For the Year Ended Dec 31, 2010 | ||
| Cash Flows from Operating Activities: | ||
| Operating Income (EBIT) | $489,000 | |
| Depreciation Expense | 112,400 | |
| Loss on Sale of Equipment | 7,300 | |
| Gain on Sale of Land | −51,000 | |
| Increase in Accounts Receivable | −84,664 | |
| Decrease in Prepaid Expenses | 8,000 | |
| Decrease in Accounts Payable | −97,370 | |
| Decrease in Accrued Expenses | −113,860 | |
| Net Cash Flow from Operating Activities | $269,806 | |
| Cash Flows from Investing Activities: | ||
| Sale of Equipment | $89,000 | |
| Sale of Land | 247,000 | |
| Purchase of Equipment | −100,000 | |
| Net Cash Flow from Investing Activities | 136,000 | |
| Cash Flows from Financing Activities: | ||
| Payment of Dividends | −$90,000 | |
| Payment of Bond Payable | −200,000 | |
| Net Cash Flow from Financing Activities | −290,000 | |
| Net Change in Cash | $115,806 | |
| Beginning Cash Balance | 319,730 | |
| sEnding Cash Balance | $435,536 | |
Irfanullah Jan (Accounting Explained)
