The cash flow statement shows the companies cash inflows and outflows over the financial period. It can be classified under three broad heads:
1. Operating cash flows: It includes the cash flows related to the normal day to day functioning of the business. It includes firms’ primary activities of trade. It also includes payment of income taxes.
2. Investing cash flows: It includes the cash flows relating to buying, selling of fixed assets like plant, machinery, buildings, land, etc. It also includes acquisition or sale of securities or segment, investment in other firm. Broadly it can be stated that it includes transactions that deal with acquisition or sale of long term assets.
3. Financing cash flows: It includes the cash flows relating to issuance or retirement of firms’ debt, debentures, shares and dividend paid to shareholders.
One very important thing to note here is that how a transaction is defined depends on the nature of the business the firm does. The most suitable example can be of banks. While issuing or holding long term securities will be an investing activity for most of the firms, but in the case of banking institutions it will be classified as an operating activity.
The firm's cash flow is quite different from its net income. These differences can arise for at least two reasons:
1. The income statement does not recognize capital expenditures as expenses in the year that the capital goods are paid for. Instead, it spreads those expenses over time in the form of an annual deduction for depreciation.
2. The income statement uses the accrual method of accounting, which means that revenues and expenses are recognized as they are incurred rather than when the cash is received or paid out.
3. Further, the income statement takes into account noncash charges like depreciation, amortisation and write off expenditures which do not result in any actual inflow or outflow. But these transactions are excluded from cash flow statement.
Cash flow is the money that is moving (flowing) in and out of your business in a month. Although it does seem sometimes that cash flow only goes one way - out of the business – it does flow both ways.
The purpose of the cash flow statement is to show where an entities cash is being generated (cash inflows), and where its cash is being spent (cash outflows), over a specific period of time (usually quarterly and annually). It is important for analyzing the liquidity and long term solvency of a company.
The cash flow statement uses cash basis accounting instead of accrual basis accounting which is used for the balance sheet and income statement by most companies. This is important because a company may accrue accounting revenues but may not actually receive the cash. This could produce profits and taxes payable but not provide the resources to stay solvent.
Cash from operating activities usually refers to the net cash inflow reported in the first section of the statement of cash flows. Cash from operating activities focuses on the cash inflows and outflows from a company's main business activities of buying and selling merchandise, providing services, etc. Cash from operating activities excludes the amount spent on capital expenditures such as new equipment and new facilities, the cash used for other long-term investments, and the cash received from the sale of long-term assets. Cash from operating activities also excludes the amount paid to stockholders in dividends or to acquire treasury stock, the amounts received from issuing stock and bonds, and the amounts spent to retire bonds.
Negative operating cash flows, combined with cash inflows from investing (e.g., selling assets) and financing activities (e.g., borrowing), may indicate a serious financial problem. On the other hand, positive operating cash flows combined with negative investing cash flows indicate goods financial performance and growth.
Prepare the cash flows from operating activities section of cash flow statement by direct method using the following information:
December 31 2011 2010 Accounts Receivable $34,130 $28,410 Prepaid Rent 20,000 25,000 Prepaid Insurance 6,800 6,000 Inventory 23,030 15,450 Accounts Payable 14,590 31,300 Salaries Payable 8,310 5,120 Interest Payable 700 360 Income Tax Payable 2,340 0
Year Ended December 31 2011 Net Sales 64,970 Salaries Expense 8,610 Rent Expense 5,000 Insurance Expense 3,200 Interest Expense 1,650
Cash Flow from Operating Activities: Cash Receipts From Customers (1) $59,250 Cash Payments To Suppliers (2) −24,290 To Employees (3) −5,420 For Purchase of Prepaid Assets (4) −4,000 Interest (5) −1,310 Income Tax (6) −0 Net Cash Flow from Operating Activities 24,230
1) 64,970 + 28,410 - 34,130 2) 23,030 - 15,450 + 31,300 - 14,590 3) 5,120 - 8,310 + 8,610 4) 20,000 + 6,800 + 5,000 + 3,200 - 25,000 - 6,000 5) 360 - 700 + 1,650 6) 0 - 2,340 + 2,340
Cash flow from investing activities is an item on the cash flow statement that reports the aggregate change in a company's cash position resulting from any gains (or losses) from investments in the financial markets and operating subsidiaries and changes resulting from amounts spent on investments in capital assets such as plant and equipment.
Here’s a short list of common cash inflows and outflows listing in the investing section of the cash flows statement.
Cash flows from financing activities is a line item in the statement of cash flows. This statement is one of the documents comprising a company's financial statements. The line item contains the sum total of the changes that a company experienced during a designated reporting period that were caused by transactions with owners or lenders to either:
|Cash From Bonds Issued||$1,000|
|Cash From New Stock Issued||$2,000|
|Repayment on Existing Loans||($200)|
|Repurchase of Existing Stock||($700)|
|Net Cash Flow from Financing Activities||$1,600|
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