A cash flow statement is a statement produced by a company to help in identifying cash inflow and cash outflow. The various sources of inflow and outflow of cash are usually categorized into operation, financing or investments. It is important to note that there is a difference between a cash flow statement and an income statement. An income statement just shows the profit of the company in a year while the cash flow statement shows the amount of cash a business has at hand. It acts as a link between the balance sheet and the income statement. These days, there is accounting software available to help you prepare this statement. As an alternative, you can download cash flow statement templates and fill them out.
Purpose of A Cash Flow Statement
There are various reasons why every business needs to have a cash statement. The following are some of those reasons;
- Every company needs to have a CFS so that it can understand its liquidity position. The investors will, therefore, be able to know whether there is any change in the liquidity position of the firm between one year and the other.
- It also helps investors to identify the transactions that are not illustrated in the income statement and the balance sheet.
- With a cash statement, the management of the firm and the stakeholders can identify the free flow of cash in the business. It is the amount of money generated from the normal operations of the company.
- A business needs this statement so that it makes an informed decision before making any financial commitment in the future.
Uses of the Cash Statement In Business Accounting
- Every business needs a CFS so that the investors can easily identify the sources of cash. This will help them to analyze the ability of the business to pay off debts and meet its payments.
- If a business has a CFS, it becomes easier to know the current capital expenditure in the firm. If the expenditure is negative, it means that the business is spending too much on equipment while a positive expenditure is an indicator that the company sold specific machines that were not necessary.
Basic Methods of Preparing Cash Flow Statement
As mentioned above, a well-structured cash flow statement has to include three sections; the operating, the investing and the financing. The cash flow statement can be prepared either using the direct method or the indirect method. The difference between them is in the first section.
1.The Direct Method
In the first section, this method shows all the cash received from any sources, including the customers. It also indicates all the cash payments and disbursements. With the direct approach, you can come up with the net cash flows from operations. It is obtained by calculating the difference between cash receipts and cash payments.
2. Indirect Method
The information used to prepare the cash statement using this method comes from the balance sheet for the past two years, the firm’s current income statement and the data from the general ledger. The net cash flow is obtained by subtracting net revenue from the income statement and then adding back depreciation. After that, you can record the changes in the balance sheet and then use the format of assets and liabilities.
Samples & Templates
Information Required To Prepare A Cash Flow Statement
To come up with a correct cash flow statement, you need the following information;
- Current assets and current liabilities- this is a summary of the operations of the business.
- Non-current assets in the company – this is where the business puts its money for the long term.
- Non-current assets and liabilities- these are the sources of money in the company.
Steps To Create A Cash Flow Statement
The heading of the cash statement – it has three lines. The first line contains the name of the company. The second line presents the title of the report, and the third line states the period that the statement covers, usually worded as “For the year ending.”
- Indicate the cash flow from operating activities. Include cash received from customers and cash paid to suppliers.
- Outline the cash flow from investing activities. A good example is the money received from additional equipment.
- Cash flow from financing activities. Most of the information here is the cash received from bank loans.
- All cash inflows should be indicated in positive figures while the outflows are noted in negative numbers.
- After you have computed all the inflows and outflows, calculate the net cash increase or decrease.
- This amount is then added to the cash at the beginning of the period.
- Ensure that you have drawn a single line every time you compute an amount to indicate that a financial operation has been completed.
- The balance at the end of the period is double-ruled.