Cash Flow Statement

Cash Flow Statement is an integral part of the financial statement a company prepares which contains the financial status of the company.
The cash flow statement records the inflow and outflow of money for a given time period. It is prepared on a monthly or even on a quarterly basis.

The cash flow statement records the impact of alterations in balance sheet and income accounts on the flow of cash for the company. It contains the record of cash transaction that has taken place for the operations, investment and financial activities separately. It is instrumental in the analysis of the financial position of a company. The statement is used as a tool to determine the short-term possibility of an organization that is the capability of a company to clear the payment. The International Accounting Standard deals with the cash flow statements and is the authority on the statements.

Purpose of Cash Flow Statement:

The cash flow statement was referred to as the statement of changes in financial position or flow of funds statement previously in the accounting world. It represents the financial position of a company. It reflects how much liquid money is available in the company. This kind of a statement is only concerned with recording the cash inflow and outflow of a company and does not include the indirect transactions in which cash is not involved.

In other words, it does not contain any information other than the receipt and payment of cash of into and from the company. This statement only records the reports on financial activities and not on non cash activities. Non cash activities normally find a place at the end of the page.The employees, investors, accounting personnel and the creditors are the people who are benefited from viewing this statement.

History of Cash Flow Statement:

Financial Accounting Standards Board (FASB) in 1971, USA made it compulsory under the Generally Accepted Accounting Principles (GAAP) to report the flow of funds. During the 1980s, more emphasis was laid on the prediction of future cash flow, but since 1987 FASB made it mandatory that the companies provided a cash flow statement.Finally the International Accounting Standards Board issued IAS7, according to which every firm must provide a cash flow statement. This was brought into effect from 1994.

Components of the Cash Flow Statement:

The cash flow statement of a company is based on three factors. The core operations, financing and investing are the three factors on which the cash flow of a company depends.

The operations part is the major part of the company’s activities. It includes the production, delivery and sales of a company through which a company earns its funds. Right from purchasing the raw materials to manufacturing the product, from endorsing the product to selling the product everything comes within the purview of operations. The company earns it cash through certain operations which include the receipt of payment from the sale of goods, services, loans and equity instruments. It also earns from the interest received on loans and form the dividends received on equity securities. It also has to pay money to the suppliers of goods, to its employees, pay taxes, pay for the sale of loans and equities. Certain gains and losses of the company are added later to this statement. They are:

  • Deferred Tax
  • Depreciation
  • Amortization

Investment is also an important part of the business. A company can invest in a lot of things. The company invests in buying equipment and short-term assets. Basically it entails the outflow of cash but when the company divests an asset it gains some cash therefore making it an inflow of cash. The inflow of cash also occurs in a company from the financing part of the business. The company earns cash through financing various projects. The changes in debt, dividends may culminate in inflow of cash for the company. When the company makes the bonds float in the market it earns cash and builds on its capital about simultaneously when it pays interest it loses cash also.

Methods of Preparing the Statement of Cash:

There are two methods which are used to prepare the statement. They are:

  • Direct Method: In this type of statement the gross receipt and payments of the company are reported.
  • Indirect Method: In this type of statement adjustments are made to the net income report while preparing the statement. It entails a series of additions and deductions to achieve the conversion of the net income report into the cash statement.

 

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