Statement of Cash Flows

A statement of cash flows is a financial statement which summarizes cash transactions of a business during a given accounting period and classifies them under three heads, namely, cash flows from operating, investing and financing activities. It shows how cash moved during the period by indicating whether a particular line item is a cash in-flow or a cash out-flow. The term cash as used in the statement of cash flows refers to both cash and cash equivalents. Cash flow statement provides relevant information in assessing a company's liquidity, quality of earnings and solvency.

Sections

As stated above, a statement of cash flows comprises of three sections:

  1. Cash Flows from Operating Activities

    This section includes cash flows from the principal revenue generation activities such as sale and purchase of goods and services. Cash flows from operating activities can be computed using two methods. One is the Direct Method and the other Indirect Method.

  2. Cash Flows from Investing Activities

    Cash flows from investing activities are cash in-flows and out-flows related to activities that are intended to generate income and cash flows in future. This includes cash in-flows and out-flows from sale and purchase of long-term assets.

  3. Cash Flows from Financing Activities

    Cash flows from financing activities are the cash flows related to transactions with stockholders and creditors such as issuance of share capital, purchase of treasury stock, dividend payments etc.

Format and Example

Following is a cash flow statement prepared using indirect method:

Company A, Inc.
Cash Flow Statement
For the Year Ended Dec 31, 2010
 
Cash Flows from Operating Activities:
Operating Income (EBIT)$489,000
Depreciation Expense112,400
Loss on Sale of Equipment7,300
Gain on Sale of Land−51,000
Increase in Accounts Receivable−84,664
Decrease in Prepaid Expenses8,000
Decrease in Accounts Payable−97,370
Decrease in Accrued Expenses−113,860
Net Cash Flow from Operating Activities$269,806
 
Cash Flows from Investing Activities:
Sale of Equipment$89,000
Sale of Land247,000
Purchase of Equipment−100,000
Net Cash Flow from Investing Activities136,000
 
Cash Flows from Financing Activities:
Payment of Dividends−$90,000
Payment of Bond Payable−200,000
Net Cash Flow from Financing Activities−290,000
Net Change in Cash$115,806
Beginning Cash Balance319,730
sEnding Cash Balance$435,536

Written by Irfanullah Jan