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✓ Checked for updates, April 2022. Accountingverse.com
What is a Statement of Cash Flows?
A Statement of Cash Flows (or Cash Flow Statement) shows the movement in the Cash account of a company. Accountants follow the accrual basis in measuring income and expenses. However, many users are also interested in how much cash came in and went out of the company; hence the need to present a Statement of Cash Flows.
Statement of Cash Flows Example
Here is a sample cash flow statement for Carter Printing Services, a service type sole proprietorship business.
All amounts are assumed and simplified for illustration purposes.
| Carter Printing Services |
| Statement of Cash Flows |
| For the Year Ended December 31, 2021 |
| | | |
| Cash Flow from Operating Activities: | | |
| Cash received from customers | $ 146,000 | |
| Cash paid for expenses | (81,000) | |
| Cash paid to suppliers | (47,500) | $ 17,500 |
| Cash Flow from Investing Activities: | | |
| Cash paid to acquire additional equipment | | (20,300) |
| Cash Flow from Financing Activities: | | |
| Cash received from investment of owner | $ 10,000 | |
| Cash received from bank loan proceeds | 50,000 | |
| Cash paid to bank for partial loan repayment | (27,000) | |
| Cash paid to owner for withdrawal | (20,000) | 13,000 |
| Net Increase (Decrease) in Cash for the Year | | $ 10,200 |
| Add: Cash – January 1, 2021 | 10,800 |
| Cash – December 31, 2021 | $ 21,000 |
Explanation and Pointers
- Statement of Cash Flows presents the inflows and outflows of cash in the different activities of the business, the net increase or decrease in cash, and the resulting cash balance at the end of the period. Cash inflows refer to receipts of cash while cash outflows to payments or disbursem*nts.
- A typical cash flow statement starts with a heading which consists of three lines. The first line presents the name of the company; the second describes the title of the report; and the third states the period covered in the report.
- Notice that the third line is worded "For the Year Ended..." This means that the information included in the report covers a span of time. In the illustration above, the report presents inflows and outflows of cash for 1 year, i.e. from January 1 to December 31, 2021.
- Cash inflows and outflows are classified in three activities: operating, investing, and financing.
- Operating activities refer to the main operations of the company such as rendering of professional services, acquisition of inventories and supplies, selling of inventories for merchandising and manufacturing concerns, collection of accounts, payment of accounts to suppliers, and others. Generally, operating activities refer to those that involve current assets and current liabilities.
- Investing activities may be summed up as: "where the company puts its money for long-term purposes", such as acquisition of property, plant and equipment; and investment in long-term securities. Selling these properties are also considered investing activities. In general, investing activities include transactions that involve non-current assets.
- Financing activities refer to: "where the company gets its funds", such as investment of the owner/s, and cash proceeds from bank loan and other long-term payables. The payment of such items (i.e. withdrawal of owner/s and payment of loans) are also financing activities. Generally, financing activities include those that affect non-current liabilities and capital.
- All inflows are presented in positive figures while all outflows in negative (in parentheses).
- After inflows and outflows are presented, the net increase or decrease in cash is computed. Then it is added to the beginning balance of cash to get the balance at the end. Easy, right? In simple sense, this report presents the cash balance at the beginning of the period, the changes during the period, and the resulting balance at the end of the period.
- Notice that the cash balance at the end, $ 21,000, is the same as the cash balance presented in the company's Balance Sheet.
- Good accounting form suggests that a single line is drawn every time an amount is computed. It signifies that a mathematical operation has been completed. The computed balance at the end of the report is double-ruled.
Key Takeaways
It presents cash inflows (receipts) and outflows (payments) in the three activities of business: operating, investing, and financing.
Operating activities pertain to the main operations of the business, such as purchasing and selling.
Investing activities involve acquisition of assets for long-term purposes, and the returns from them.
Financing activities pertain to sources of funding, and includes the receipt of the funds and the repayment thereof.
Web link
APA format
Cash flow statement (2022). Accountingverse.
https://www.accountingverse.com/accounting-basics/cash-flow-statement.html
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More under Financial Statements
1
Introduction to Financial Statements2
Income Statement3
Statement of Changes in Equity4
Balance Sheet5
Statement of Cash Flows
FAQs
Answer: A Cash Flow Statement is a statement showing inflows and outflows of cash and cash equivalents from operating, investing and financing activities of a company during a particular period. It explains the reasons of receipts and payments in cash and change in cash balances during an accounting year in a company.
Is cash flow statement easy? ›
The cash flow statement is believed to be the most intuitive of all the financial statements because it follows the cash made by the business in three main ways: through operations, investment, and financing. The sum of these three segments is called net cash flow.
How to check if the cash flow statement is correct? ›
How can you ensure cash flow statement accuracy?
- Review your income statement and balance sheet.
- Categorize your cash flows correctly. ...
- Use the indirect method for operating cash flows. ...
- Reconcile your cash flows with your bank statements. ...
- Use accounting software and tools. ...
- Here's what else to consider.
The primary purpose of the statement is to provide relevant information about the agency's cash receipts and cash payments during a period.
What are the limitations of the cash flow statement? ›
As a cash flow statement is based on a cash basis of accounting, it ignores the basic accounting concept of accrual. Cash flow statements are not suitable for judging the profitability of a firm, as non-cash charges are ignored while calculating cash flows from operating activities.
What is a cash flow statement for dummies? ›
A cash flow statement summarizes the amount of cash and cash equivalents entering and leaving a company. The CFS highlights a company's cash management, including how well it generates cash. This financial statement complements the balance sheet and the income statement.
What is a cash flow example? ›
Example of Cash Flow
Proceeds from issuing long-term debt, debt repayments, and dividends paid out are accounted for in the cash flow from the financing activities section.
How often do you prepare a cash flow statement? ›
It traces the flow of funds (or working capital) into and out of your business during an accounting period. For a small business, a cash flow statement should probably be prepared as frequently as possible. This means either monthly or quarterly. An annual statement is a must for any business.
Is cash flow the same as profit? ›
So, is cash flow the same as profit? No, there are stark differences between the two metrics. Cash flow is the money that flows in and out of your business throughout a given period, while profit is whatever remains from your revenue after costs are deducted.
How to prepare cash flow statement from balance sheet with example? ›
Follow these steps to prepare a statement of cash flows:
- Choose a time frame and method to use. ...
- Collect basic data and documents. ...
- Calculate balance sheet changes and add them to the statement of cash flows. ...
- Adjust all noncash expenses and transactions. ...
- Complete the three sections of the statement.
What is Cash Flow? Cash flow refers to the net balance of cash moving into and out of a business at a specific point in time. Cash is constantly moving into and out of a business.
What is a good cash flow ratio? ›
A high number, greater than one, indicates that a company has generated more cash in a period than what is needed to pay off its current liabilities. An operating cash flow ratio of less than one indicates the opposite—the firm has not generated enough cash to cover its current liabilities.
Is cash flow accurate? ›
In most businesses, there are so many variables outside your control that it is unrealistic to expect a cash flow forecast to be 100% accurate. For example, there be unexpected expenses, some of which may be significant. And, of course, some customers may not pay sales invoices on time.
What is the most important number on a statement of cash flows? ›
Regardless of whether the direct or the indirect method is used, the operating section of the cash flow statement ends with net cash provided (used) by operating activities. This is the most important line item on the cash flow statement.
What is the cash flow statement? ›
A cash flow statement is a financial statement that shows how cash entered and exited a company during an accounting period. Cash coming in and out of a business is referred to as cash flows, and accountants use these statements to record, track, and report these transactions.
What is a cash flow statement quizlet? ›
Statement of Cash Flows. Shows the changes in cash for the same period of time as that covered by the income statement. The cash flow statement shows all sources of cash and all of the uses of cash. Provides information about cash receipts (inflows) and cash payments (outflows).
What is cash flow analysis answer in one sentence? ›
A cash flow analysis determines a company's working capital — the amount of money available to run business operations and complete transactions.
What is the definition of cash flow? ›
What is Cash Flow? Cash flow refers to the net balance of cash moving into and out of a business at a specific point in time. Cash is constantly moving into and out of a business. For example, when a retailer purchases inventory, money flows out of the business toward its suppliers.
