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Introduction to Cash Flow Statement
Definition of Cash Flow Statement
A cash flow statement is a type of financial statement that presents total information on all cash inflows a business makes from ongoing activities and outside sources. It also covers any cash outflows made within a specific time period to cover investments and business expenses.
The financial statements of a firm give investors and analysts a picture of all the business transactions that take place, where each transaction helps the company succeed. Because it tracks how much money the company makes via operations, investments, and borrowing, the cash flow statement is seen to be the most understandable of all the financial statements. Net cash flow is the total of these three components.
What is a cash flow statement?
A cash flow statement (CFS) is a crucial instrument for managing finances since it tracks an organization’s cash flow. Along with the income statement and balance sheet, this statement is one of the three financial documents that contribute to assessing the success of the business. The CFS assists in creating a cash projection for short-term planning as a result.
A cash flow statement (CFS) is a type of financial report that displays a company’s inflows and outflows of cash and cash equivalents. Additionally, operating, investing, and financial activities generate cash inflows. Additionally, costs paid for business ventures and investments are included in cash outflows. As a result, the management can use this information to assist regulate corporate operations.
A cash flow statement also gauges how effectively a business manages its cash situation. In other words, it demonstrates the company’s capacity to raise money to cover operational costs and repay debt. The CFS is a crucial statement since it enables investors to evaluate the company’s financial situation. Additionally, it can be beneficial for helping them make better-informed investing selections.
Importance of a cash flow statement
Any firm must have enough cash on hand to be successful. The significance of a cash flow statement is as follows:
Information about Outflows: Understanding the company’s ability to make principle payments to its creditors is also made easier with the use of a cash flow statement. Additionally, it displays specific transactions such as the acquisition of inventories, the extension of credit to clients, the purchase of capital equipment, etc. that are not reported in cash in other financial 1statements.
Maintaining Optimal financial Balance: A CFS assists in analyzing and maintaining a favorable financial position. Finding out if there is a surplus of cash or a deficit of dollars is helpful. Additionally, if there is extra cash on hand, the company might invest it in stock or purchase merchandise. The corporation can then search for places to borrow money to keep the business operating smoothly if there is a lack of finances,focuses on cash generation Profit, which also comes from producing money, is essential for the company’s growth. There are, however, a number of additional ways to make money. For instance, a business produces income when it costs less to buy equipment.
A cash flow statement is useful for short-term planning in order to fulfill a variety of responsibilities. Therefore, firms must always have enough money on hand to cover their anticipated obligations. Additionally, the CFS assists the financial management in analysing the data from previous transactions to provide a cash flow estimate for near-term planning. For instance, the prior cash flow statements may be used to anticipate the cash shortfall the business would have after paying off its debts or to generate a cash surplus in order to apply for bank credit.
How the Cash Flow Statement Is Used
The cash flow statement provides information on a company’s operations, sources of funding, and financial transactions. The CFS, often referred to as the statement of cash flows, aids creditors in determining how much cash is available (also known as liquidity) for the business to meet its operational costs and settle its obligations. Investors value the CFS equally since it informs them of a company’s financial stability. They might utilize the statement as a result to decide on their investments in a better, more knowledgeable manner.
How Cash Flow Is Calculated
The difference between all of the company’s cash inflows and cash withdrawals during a specific time period is known as net cash flow. It’s a crucial sign of a business’s financial stability.
Formula for net cash flow
- Simply divide the entire cash intake by the total cash outflow to find net cash flow. Total cash inflows minus total cash outflows equals net cash flow. The operating cash flow (OCF) reveals how much money the business can make from regular operations.
Formula for operating cash flow
- Add your net income and non-cash costs, then deduct the change in working capital to get operational cash flow. Net income plus non-cash expenses minus changes in working capital equal operating cash flow.
- A cash flow statement contains all of them. The net flow of cash between the firm and its owners, creditors, and investors is known as cash flow from financing activities (CFF). It displays the finance mix of the business.
Formula for cash flow from financing activities
- Add your dividends paid to the buyback of debt and stock, then deduct the amount from cash inflows from issuing equity or debt to compute your cash flow from financing operations.
- Dividends paid + Repurchase of Debt and Equity – Financing Cash Flow from Issuing Equity or Debt. The net cash influx or outflow from capital investments, mergers and acquisitions, and the purchase or sale of marketable securities is known as cash flow from investing (CFI).
Formula for cash flow from investment activities
- Add the acquisitions or sales of real estate, machinery, equipment, other enterprises, and marketable securities to the cash flow from investment operations. CFI equals the buying and selling of real estate, equipment, other businesses, and marketable securities. A comparison of non-current assets on the balance sheet across two periods can also be used to pinpoint these things, which are all reported in a cash flow statement.
Cash Flow Statement Format
Statement of Cash Flows |
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Cash flows from operating activities |
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Cash receipts from customers | 3,09,000.00 | 2,63,150.00 | |
Cash paid to suppliers and employees | (2,69,500.00) | (2,49,625.00) | |
Cash generated from operations | 39,500.00 | 13,525.00 | |
Interest paid | (2,800.00) | (2,800.00) | |
Income taxes paid | (4,000.00) | (3,000.00) | |
Dividends paid | (1,850.00) | (1,500.00) | |
Net cash from operating activities | 30,850.00 | 6,225.00 | |
Cash flows from investing activities |
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Business acquisitions, net of cash acquired | (17,500.00) | – | |
Purchase of property, plant and equipment | (4,300.00) | (2,000.00) | |
Purchase of intangible assets | – | (10,000.00) | |
Proceeds from sale of equipment | – | 400.00 | |
Proceeds from sale of intangibles | – | – | |
Acquisition of investments | (10,000.00) | (1,500.00) | |
Investment income | 4,800.00 | 2,700.00 | |
Net cash used in investing activities | (27,000.00) | (10,400.00) | |
Cash flows from financing activities |
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Proceeds from issue of share capital | – | 25.00 | |
Proceeds from long-term borrowings | 10,000.00 | 4,000.00 | |
Payment of long-term borrowings | (3,950.00) | (1,450.00) | |
Net cash used in financing activities | 6,050.00 | 2,575.00 | |
Net increase in cash and cash equivalents | 9,900.00 | (1,600.00) | |
Cash and cash equivalents at beginning of period | 1,600.00 | 3,200.00 | |
Cash and cash equivalents at end of period | 11,500.00 | 1,600.00 | |
Cash Balance Control Total | – | – | |
Notes to the Statement of Cash Flows | 2020 | 2019 | |
Cash flows from operating activities |
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Profit / (Loss) before taxation | 42,300.00 | 11,400.00 | |
Adjustments for: |
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Depreciation | 4,700.00 | 2,500.00 | |
Amortization | 1,000.00 | 1,000.00 | |
Investment income | (5,000.00) | (3,500.00) | |
Interest expense | 4,000.00 | 3,000.00 | |
Profit / (Loss) on the sale of property, plant & equipment | 300.00 | (400.00) | |
Profit / (Loss) on the sale of intangible assets | – | – | |
Movement in reserves | – | – | |
Working capital changes: |
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(Increase) / Decrease in trade and other receivables | (8,700.00) | (2,850.00) | |
(Increase) / (Decrease) in inventories | (3,500.00) | (3,500.00) | |
Increase / (Decrease) in trade and other payables | 4,400.00 | 5,875.00 | |
Cash generated from operations | 39,500.00 | 13,525.00 | |
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What is negative cash flow?
A negative cash flow situation occurs when your company spends more money than it brings in. Sales cannot be used to pay all of your costs. Instead, you must obtain the necessary funds through finance and investments. For instance, if your sales in April was $5,000 and your costs were $10,000, your cash flow was negative. The cash flow of fledgling firms is frequently negative. However, a company cannot survive with persistently negative cash flow. If you cannot make enough money to pay your bills, you will eventually run out of money.
Conclusion
A company’s strength, profitability, and long-term prognosis may all be determined using a cash flow statement. The CFS can assist in figuring out whether a business has adequate liquidity or cash to cover its costs. A CFS may be used by a business to forecast future cash flow, which is beneficial for budgeting purposes.Investors use the CFS to gauge a company’s financial health since it often indicates how much cash is available for commercial activities. This is not a strict rule, though. When a corporation chooses to expand its operations as part of its growth plan, this might occasionally result in negative cash flow.An investor may gain a strong grasp of the financial health of a firm and a clear image of how much cash a company earns by analyzing the CFS.
