The statement of cash flows, or the cash flow statement, is a financial statement that summarizes the amount of money entering and leaving a company. The cash flow statements are a way for businesses to measure their ability to generate enough money in order to fund expenses and pay off debt. The cash flow statement builds on the balance sheet and income statement, which are other sources of financial information.

The Structure of the Cash Flow Statement

The main components of the cash flow statements are:

Cash from operating activities

Cash from investing activities

Cash from financing activities

Disclosure of noncash activities is sometimes included in the financial statements prepared under GAAP.

The CFS in the financial statements does not take into account how much cash is collected from customers and paid out for expenses. Thus, the amount of cash on hand would not be the same as net income- which includes sales of goods that are charged to credit.

How a statement of Cash Flows Is Calculated

A Cash flow statement is calculated by making certain adjustments to net income by adding or subtracting differences in revenue, expenses, and credit transactions from one period to the next. Non-cash items are not considered when calculating net income and total assets, so many transactions have to be reevaluated when calculating cash flow statements from operations.

Direct Cash Flow statement format Method

The direct method will list all the various types of monetary payments and receipts, including cash generated and paid to suppliers, customers’ cash receipts from stores, and money that is spent out on salaries. The accounts are calculated by looking at an account’s starting balance.

Indirect Cash Flow Method

The indirect method starts by deducting any outflows from the company’s income statement. Net Income is computed after calculating all expenses, but before accounting for depreciation or amortization charges (although these would be deducted from net income in subsequent steps).

Net income cannot be considered an accurate representation of net cash flows from operating activities, so earnings before interest and taxes (EBIT) must be adjusted for items that affect net income but have no effect on a company's operating cash flows. Non-operating activities which do not affect COFFF are also included in the indirect method to calculate COFF.

For instance, depreciation is not really a cash expense because it an amount that deducts from the total value of an asset accounted for before. The reason it is added back into net earnings to calculate operating cash flows.

Accounts Receivable and Cash Flow

Decreases in accounts receivable must also be taken into account when reading the operating cash flow statement. Accounts receivable decreases implies that more cash has entered the company from customers paying off their credit accounts—the amount of AR decrease is then added to net earnings. If the amount of accounts receivable is higher in one accounting period than another, net earnings are reduced by this total because there will be no cash generated from this increase in AR receipt.

Inventory Value and Net Cash Flow

In contrast, an increase in inventories means that a company has purchased more materials. If the inventory was paid for using cash, the rise in the value of those inventories causes net earnings to decrease accordingly. When the inventory has decreased, this would be added to net earnings. If inventory was purchased on credit, an increase in accounts payable would be found on the balance sheet and the difference from one year to another is used as a line item for public shareholders.

A company's net income is calculated by subtracting what has been paid off from unpaid debts. If there are no more debts, then the company's net earnings will be zero. If a company still owes money, then all of its earnings go to paying down those balances.

Negative Cash Flow Statement template

Of course, not all cash flow statements look this healthy or exhibit a positive cash flow, but negative cash flow should not automatically raise a red flag without further analysis. Sometimes, negative cash flow is the result of a company's decision to expand its business at a certain point in time, which would be a good thing for the future. Cash flow is an easy way to track changes and see if a company will have success in the future.

Balance Sheet and Income Statement

The cash flow statements are derived from the income statement and balance sheet. Net earnings from the income statement are deducted to come up with this information.

When calculating net cash flow, the net change in cash for the current year should mirror any changes to cash inflows from one year to the next that span two consecutive financial statements.

The Conclusion

A cash flow statement is a valuable measure of an organization's liquidity and its long-term future outlook. The statement can help determine whether a company has enough financing (cash) to pay for expenses. A company can use the statement to predict future cash flow, which helps when budgeting.

The cash flow statement reflects a company's financial health since typically the more money flowing in and out of a business is better. However, this isn't always the case-sometimes, a negative income might be occurring because the business is investing in itself by expanding its operations.

Studying a company's cash flow statement can give investors a clear picture of how much cash the company generates and help them understand the financial well-being of the company.