What is a Statement of Cash Flow?

A statement of cash flow, also known as a cash flow statement, is one of four types of business financial statements. It summarizes and details all cash inflows and outflows and is broken down into operating, investing, and financing cash flows.

Cash flow statements can be used to determine a company’s cash production, and investors use this annual report to determine the quality of earnings. It is also used to determine the liquidity and solvency of an organization. Cash flow statements may be prepared and published monthly, quarterly, or annually.

Direct and indirect cash flow statements

There are two methods of reporting cash flow statements:

  • Direct - This method takes every cash transaction and ignores all non-cash transactions. It is similar to that of a bank statement and is considered simpler to receive and analyze. However, it needs to be freshly calculated every reporting period.
  • Indirect - This method uses the net profit figure from another type of business financial statement, the profit and loss statement. All incoming and outgoing non-cash transactions are added to and subtracted from that figure, leaving a closing cash position. The indirect method includes figures like depreciation and can be quickly and easily prepared, but it lacks the line data of the direct method.

The three elements of a statement of cash flow

The cash flow statement is broken down into operating, investing, and financing cash flows, as follows:

  • Operating — Operating cash flow is the cash that is received and paid out as part of the daily running of the business. It includes running costs like the purchase of raw materials and other materials, as well as revenue from customer payments.
  • Investing — Investing activities are those that are considered to have a long-term impact on the business. This can include the purchase and sale of property, as well as other assets like industrial machinery. It may also include supplier loans and business acquisition costs.
  • Financing — Debt, equity, and dividend payments and receipts are included in the financing section of the statement. Dividends paid to shareholders are included here, but any dividends received by the business should be included in operating costs.

Disclosure of non-cash activities

In some cases, a business may also include non-cash activities as a footnote. Costs might include leasing to buy an asset through a lease-purchase agreement or issuing stock to pay off a debt. Because no cash was exchanged in these circumstances, they shouldn’t be included in the main body of a cash flow statement, but they’re still an important piece of the puzzle for accurately representing the company’s financial position.

Positive and negative cash flow statements

When the final figure in a cash flow statement is positive, it means that there is more money coming in than going out.

In contrast, a negative cash flow statement shows more money being paid out than is returned in revenue. A negative cash flow statement does not necessarily mean the company is operating at a loss. They may have been repaying debt or issuing stock buybacks during the statement period.

What cash flow statements show

A cash flow statement shows only the cash income and expenditure of a business. Taken on its own, the data does not tell a full story. However, a cash flow statement provides a general overview of how well a business is handling its finances.

A business can use its cash flow statement to determine where money is leaving and entering the business. It can be used to determine whether a business is making enough cash to meet its debt obligations while retaining enough for its daily activities.

Investors can compare the figures in the cash flow statement to that of net income. Where operating cash income is higher than net income, a business is said to have “high-quality earnings.” The quality of earnings removes any financial tricks and leaves a clear indication of a company’s financial performance.

Produced monthly, quarterly, or annually, statements of cash flow are a business document used to report on incoming and outgoing cash flow. Although they are used internally, cash flow statements are often used by potential investors to determine the financial worthiness of an organization. Potential investors can also use these statements to ascertain whether a business represents a sound investment opportunity.

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