Cash flow statement
From Wikipedia, the free encyclopedia
In financial accounting, a cash flow statement is a financial statement that shows incoming and outgoing money during a particular period (often monthly or quarterly). The statement shows how changes in balance sheet and income accounts affected cash and cash equivalents, and breaks the analysis down according to operating, investing, and financing activities. As an analytical tool the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7, is the International Accounting Standard that deals with cash flow statements
People and groups interested in cash flow statements include:
- Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses
- Potential lenders/creditors, who want a clear picture of a company's ability to repay
- Potential investors who need to judge whether the company is financially sound
- Potential employees or contractors who need to know whether the company will be able to afford compensation
Cash flow statements are particularly important for start-up companies with limited liquid assets. These companies are vulnerable to devastating cash shortages, even when Accounts Receivable balances point to long-term financial health.
Contents |
[edit] Statement of cash flows
| Statement of Cash Flow - Simple Example for the period 12/31/2005 to 12/31/2006 |
|
|---|---|
| Cash flow from operations (CFO) | $4,000 |
| Cash flow from investing (CFI) | $(1,000) |
| Cash flow from financing (CFF) | $(2,000) |
| Net increase (decrease) in cash | $1,000 |
[edit] Operating activities
Operating activities include the production, sales and delivery of the company's product as well as collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising and shipping the product.
Items subtracted from net income (which is found on the Income Statement) to arrive at cash flows from operations generally include:
- Depreciation
- Deferred tax
- Amortization
- Accrual items, such as wages payable
[edit] Investing activities
Investing activities focus on the purchase of the long-term assets a company needs in order to make and sell its products, and the selling of any long-term assets that are no longer needed by the company.
Items under Investing Activities include:
- Capital expenditures, includes purchases of equipment on account.
- Investments.
[edit] Financing activities
Financing activities include the influx of cash from investors such as banks and shareholders, as well as the outflow of cash to investors as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities section of the cash flow statement.
Items under the Financing activities section include:
- Dividends paid
- Sale purchase of stock
- Net borrowings
[edit] Preparation methods
[edit] Direct Method
The direct method for creating a cash flow statement includes major classes of gross cash receipts and payments. This method starts with revenues and expenses, while also including Current Assets as well as Current Liabilities. The cash flow for this example is +$40.00:
| Transaction | In (Debit) | Out (Credit) |
|---|---|---|
| Incoming Loan | +$50.00 | |
| Sales (which were paid for in cash) | +$30.00 | |
| Materials | -$10.00 | |
| Labor | -$10.00 | |
| Purchased Capital | -$10.00 | |
| Loan Repayment | -$5.00 | |
| Taxes | -$5.00 | |
| Total cash flow..............................+$40.00 | ||
[edit] Indirect Method
The indirect method uses the net profit or loss as a starting point, then makes adjustments for all transactions of a non-cash items.
Citigroup Incorporated cash flow example:[1][2]
| Period Ending | 31-Dec-03 |
|---|---|
| Operating Activities, Cash Flows Provided By or Used In | |
| Net Income | 17,853 |
| Adjustments To Net Income | 13,260 |
| Depreciation | 2,121 |
| Changes in Account Receivables | 14,188 |
| Changes In Liabilities | 31,571 |
| Changes In Inventories | - |
| Changes In Other Operating Activities | (93,848) |
| Total Cash Flow From Operating Activities | (14,854) |
| Investing Activities, Cash Flows Provided By or Used In | |
| Capital Expenditures | (2,354) |
| Provided By or Used In | |
| Dividends Paid | 5,773 |
| Treasury stock acquired Paid | (2,416) |
| Issuance of long-term debt | 67,054 |
| Payments and redemptions of long-term debt | (45,800) |
| Change in deposits | 42,136 |
| Contractholder fund deposits | 8,346 |
| Contractholder fund withdrawals | (5,976) |
| Cash flows from financing activities of continuing operations | 64,405 |
| Effect of exchange rate changes on cash and cash equivalents | 579 |
| Change in cash and due from banks | $3,823 |
[edit] References
- Cash Flow Statement Explanation with Examples.
