Statement of Cash Flows

What are Statement of Cash Flows?

CFS or cash flow statement or statement of cash flows; the names are many but it is all the same thing. This statement is one document which accompanies and complements the income sheet of the company as well as the balance sheet of it. This document was made mandatory for the companies to present along with the other two in the year 1987. What is a cash flow statement? In simple terms, it is a statement which clearly outlines the amount of cash and other items equivalent to cash which comes and goes in the company. In other words, it is a document which lets the investors in the company knows as to how the company is generating the funds for conducting business operations and in what way the expenditures are being met or the money is being utilized by glancing at the statement of cash flow reports. A faulty report can wreak havoc on the investors.

Structure of Cash Flow Statements:

The statement of cash flows is quite different from the balance sheet or the income statement of a company. This is because unlike the latter two documents, cash flow statements do not contain any cash or cash equivalent taken on credit or expected in the near future. Therefore, the cash used here is not the same as net income. However, the net income which you might have come across in the other two documents is an amalgamation of both cash sales as well as sales which are done on credit too. The cash flow in the company is dependent on three contributing factors namely

• The core operations of the company
• Investments made
• Financing

Let us understand each of them in depth to understand the concept of what is cash flow in a better fashion and the associated benefits.

Core Operations of the Company:

The statement of cash flows analysis clearly reveals the amount of cash inflow as well as the outflow in the company. It takes into account all the cash as well as other cash equivalents into account while forging a statement of cash flows operating activities. While registering the cash generated due to core operations of the company, following are taken into consideration:

• Cash related changes
• Accounts receivable
• Accounts payable
• Inventories
• Depreciation of items including machinery etc.

The cash flows into the company are actually calculated by taking into account certain items or deviations. There are certain little adjustments to be made as even non-cash items are a part of the net income statement as well as while calculating the total assets and liabilities. Since not all the items are in cash therefore, conversions have to be made and the items should be assessed in terms of their value as a cash item before getting them registered on the statement of cash flows.

Following are the items which are a part of cash flow statement resulting from operational activities according to the US GAAP (Generally Accepted Accounting Principles).

• Sale of services or goods
• Sale of debt, loans, or instruments of equity in a trading scenario
• Amounts received as interest on the loans
• Dividends
• Payments made to the employees, suppliers
• Money spent on buying merchandise

Here is a list of items which are either added or subtracted from the net income as the case may be to arrive to the statement of cash flows.

• The loss of the value of asset over a period of time. This is also known as depreciation and is tangible in nature.

• Amount of tax differed
• Intangible loss of the value of an asset over a period of time. This is also known as amortization.
• Also taken into account are the gains or the losses which are associated with the trade of an asset of the non-current type.

Investments made:

The amount of cash reserves are affected when there are changes in the equipment. This means the new machinery being brought in and the old ones being sent out. Since while buying the machinery, the cash is being spent, it is being marked as ‘cash out’. However, in the simple cash flow statement, this transaction is noted as ‘cash in’ as the cash is being used for investment into the machines which have come into the company. Same is the procedure followed in preparing sample cash flow statement while marking the entries of purchase of buildings or other short term assets like securities of the marketable nature.

Financing:

Calculations or preparing a sample cash flow statement of all the loans, debt related changes and dividends etc. are accounted for as cash from financing. When these changes or developments are made to account for they are registered as ‘cash in’ since the capital was raised. However, the money goes out to be paid among others and therefore this same cash becomes ‘cash out’ when dividends are being registered. To make this clear, the theory of how to make a cash flow statement is that when the company is issuing shares to the public, it receives financing in terms of cash whereas when it pays dividends to them, it is actually reducing its cash reserves.

Almost every company uses the cash flow analysis statement as a tool to predict future cash flows to the company. This helps in budgeting matters a lot. In fact, the financial health of the company can be judged by the cash flow analysis statement. The higher the cash flow the better it is for the company. However, there is no rule out there. Many a times, you can see that a company shows negative cash flow. Do not get alarmed as this means that the company may have used the cash into diversifying into some other business venture. In fact, many companies which are growing at a tremendous rate often show negative cash flow statement. An intelligent and smart investor will not see a cash flow statement in isolation. He needs to combine the profit and loss account, earnings earned by the company, expenditures etc. into account before coming to a decision. The most important aspect in this regard is to check and analyze how much reserves of cash flows are being accumulated due to core operations of business.