Businesses prepare three financial statements to show how they’re doing. These statements are the balance sheet, income statement, and cash flow statement.

A cash flow statement is a financial record that details the company’s cash intake and outflow during a specific time period. Additionally, it examines the differences between this year and last year.

The cash flow statement in an annual report of a corporation, when the time period is mostly one year, is often examined.

Why do you need a Cash flow statement?

What is the purpose of a cash flow statement if a corporation already discloses its net profit in its income statement?

The income statement is constructed on accrual accounting.   Whether there is a cash inflow or outflow at the moment of the transaction or not, organizations using accrual accounting count their revenues and costs.

For example, in a business, when they sell things on credit and give the customer 60 days to pay, they figure out how much they sold on credit and how much money they made from those sales. The difference between a company’s net profit and actual cash is related to whether or not they obtain their reimbursement after 60 days.

Businesses utilize cash to pay for a variety of expenses including salaries, interest, and day-to-day costs, it is regarded as the lifeblood of the business. When a business doesn’t turn its gains into cash, it is a highly risky situation for the business.

Investors carefully study the firm’s cash flow statement. They do this to understand the importance of cash and to figure out where the company gets its cash and where it spends it.

Purpose of Cash Flow Statements
  • Assessing cash positions
  • Make planning and control easier
  • Make comparisons easier
  • Decide on capital budgeting

Each company’s cash flow statement is broken down into three categories: business operations, investment activities, and interest expenses. Additionally, in each division, net cash flow is calculated by deducting cash outflow from cash intake. The change in cash flow is discovered by aggregating these three net profits.

What are the sections of the Cash flow statement?

 The cash flow statement reports a company’s major cash flows in the following categories:

  1. Cash flow from Operating Activities:

The first section of the statement includes regular business activities. Revenue from the sale of products or services, dividends received, interest, and other cash receipts, outflows include payroll, overheads, taxes, and payments to suppliers and vendors.

The first entry in this operating activity section is the net income from the income statement for a corresponding period. The below table shows the cash flow from operating activities:

    Particulars Amount (Rs)
    Cash flow from operating activities
    Net income XXX
    Additions
    Depreciation and Amortisation XXX
    Increase in current liabilities XXX
    Deductions
    Increase in current assets XXX
    Net cash flow from operating activities XXX
      1. Cash flow from Investing Activities:

      It is one of the main components of a cash flow statement. Cash flow from investing results from activities related to the purchase or sale of assets or investments made by the company (long term). It can be identified from changes in the fixed assets section of the long-term assets section of the balance sheet. Examples of cash flow from investing activities:

      •       Cash outflow from the purchase of an asset (land, building, machinery, etc.).
      •       Outflow of cash from the acquisition of another company.
      •       The inflow of cash from the sale of an asset.

      The table showing items recorded in this section are:

       

        Particulars Amount (Rs)
        Purchase of fixed assets (XXX)
        Purchase of marketable and non-marketable securities (XXX)
        Proceeds from the sale of fixed assets XXX
        Proceeds from the sale of marketable and non-marketable securities XXX
        Loans advanced (XXX)
        Loan repayment realised XXX
        Insurance proceeds XXX
          1. Cash flow from Financing activities:

          These activities are related to cash transactions for business. For example, borrowing, raising money from debt or stock, repaying, sales of your company’s securities and outflows include dividend payments and servicing debt. It also provides stakeholders insight into the company’s capital structure, how it is managed, and how far it can sustain with showcased capital.

          The components of financing activities are shown in the table below.

          Particulars Amount (Rs)
          Proceeds from the issuance of short-term borrowings XXX
          The net change in short-term borrowings (XXX)
          Repayments of long-term debt (XXX)
          Stock repurchases (XXX)
          Dividends paid (XXX)
          Dividends paid to non-controlling interest (XXX)
          Other financing activities (XXX)
          Net cash flow from financing activities (XXX)

          For any business having a positive and high cash flow is a good sign, though it does not by itself lead to success. Even profitable businesses have negative cash flow.

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