See Also:
Financial Ratios
Cash Flow After Tax
How to Create Dynamic Cash Flow Projections
Steps to Track Money In and Out of a Company
EBITDA DefinitionCash Flow Statement Definition
The cash flow statement, defined as a financial statement that shows a company’s cash inflows and cash outflows over a period of time, is one of the most important financial statements of a company. The
balance sheet includes an asset account labeled “cash.” The statement of cash flows shows how the company’s operating, investing, and financing activities affected the cash account during the fiscal period. The statement of cash flows can be used to analyze the financial health of a company.
Cash Flow Statement Explanation
Cash flow statements divide a company’s activities into three categories: operating activities, investing activities, and financing activities. Operating activities refer to the company’s core business operations. Investing activities refer to changes in long-term asset and investment accounts. Financing activities refer to changes in debt and
equity accounts. The statement details the cash inflows and outflows for the accounts in each category over the course of the fiscal period.
The bottom line of the cash flow statement, which accounts for the net cash inflows and outflows of all accounts during the fiscal period, must equal the balance of the cash account on the balance sheet.
Cash Flow Statement: Direct Method VS. Cash Flow Statement: Indirect Method
There are two ways to prepare the operating activities section of a cash flow statement: the direct method and the indirect method. These methods apply only to operating activities – investing activities and financing activities are always prepared the same way. Preparing the operating activities section of the cash flow statement either way yields the same results. The indirect method is required by industry regulations, so companies always report cash flows using the indirect method. However, if they so choose, they can also report cash flows using the direct method.
The direct method shows cash inflows and cash outflows for each of the operating activities. The indirect method, on the other hand, makes a series of adjustments to the company’s net income in order to account for the affects of noncash transactions recorded using
accrual accounting. Both methods give the same result.
Cash Flow Statement Example
Saundra has started providing angel investment to proimising start-up businesses. Operating under the name Angelco, she is using the wealth she built in her professional career to provide a chance of success for up and coming Entrepreneurs. Saundra also is not afraid of the returns she will make if one of her portfolio companies were to succeed and reach capitalization.
Saundra has a job which requires constant due dilligence. She must constantly monitor the companies she has invested in to ensure the professionalism with which she personally conducts business. As a result, she must constantly monitor financial statements. One such statement of monumental importance is the cash flow statement. Saundra survives, in part, through her skills of cash flow statement analysis.
First, Saundra wants to know how recent changes to the balance sheets of her companies affect cash and similar assets. To do this she looks to the most recent cash flow statements which were sent to her. Upon inspection Saundra finds that three of her five companies are performing well and cash is increasing as income in the fledgling companies begins to outpace costs. On her fourth company she does not see this result. Saundra understands that this could be the result of any number of reasons; slow growth, one-time problems, or poor management. Saundra has set a policy of allowing a grace period for problems to be rectified. Beyond this period, she will have to step in and replace current managers with her own team. For her fifth company Saundra comes to the conclusion, after looking through her files, that she has not received a cash flow statement. She fears she may have to get tough with these founders but continues her analysis.
Saundra also wants to monitor the financing, investment, and operational performance of her companies. Again, she looks to the cash flow statement for this. Saundra, once again, is impressed with how her first three companies are controling these actions. For her fourth company she sees the core problem; they have purchased equipment at a price higher than average to the market. She notes that she must contact her managers to correct their mistake. With any luck the equipment can be returned and purchased at a lower price, fixing both financing and investment issues in this business. She, of course, could not monitor this information with her fifth comapny.
Saundra has used the cash flow statement effectively because of her knowledge into the importance of the statement. Her experience combined with her analytical nature allow for effective monitoring of the big 3 financial statements: cashflow statement,
income statement, and balance sheet.
Cash Flow Statement Template
A cashflow statement template can be found here:
S.C.O.R.E. template gallery