The statement of cash flows, also known as Cash Flow Statement, is one of the three important financial statements that represents the amount of cash generated or used by the business during a given time period.
The cash flow statement acts as a bridge between the income statement and the balance sheet and shows how much movement of money has taken place in and out of business.
Use of Cash flow statement
The cash flow statement is used by investors to understand how a company is running its operations, from where the money is coming and how the money is being spent. A cash flow statement helps investors determine the stability of the business.
For creditors, a cash flow statement helps determine the liquidity of the business for funding daily operations and pay the existing debts.
Structure of the Cash Flow Statement
- Cash from operating activities: The main revenue-generating activities of the organisation or business, an ideal example would be any type of cash flow from current assets and current liabilities.
- Cash from financing activities: These activities generate cash flows from investor or banks.
- Cash from investing activities: The activities that result in cash flows from the acquisition and disposal of long-term assets.
The above mentioned three activities constitute the structure of the cash flow statement.
Methods of Calculation
There are two methods of determining the Cash flows, and they are the Direct Cash Flow Method and Indirect cash flow method.
Direct Method: The direct method sums up all the cash payments and receipts. It includes cash paid to suppliers, cash paid in salaries, the net of these are referred to as operating cash flow. The numbers are obtained by checking the starting and ending balance of various accounts.
Indirect Method: In this method, cash flow will be calculated by removing the net income from the income statement and converting into operating cash flow by adjusting items that were useful for calculating the net income but did not affect the cash in any way.
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