Question

What is cash flow statement?

Answer 1

Cash Flow Statement is a part of Financial Statement of a company. It literally means a statement which shows the cash entering and leaving the company from various activities.

These various activities are divided into three parts:

1) Cash Flow from Operating Activities

Example : Decrease of Debtors > +ve

2) Cash Flow from Investing Activities

Example : Sale of Land owned by company > +ve

3) Cash Flow from Financial Activities

Example : Increase in Debt > + ve

Cash Flow Statement allows investors to understand how a company's operations are running, where its money is coming from, and how money is being spent. The CFS is important since it helps investors determine whether a company is on a solid financial footing.

Creditors, on the other hand, can use the CFS to determine how much cash is available (referred to as liquidity) for the company to fund its operating expenses and pay its debts

There are two methods of calculating cash flow: The direct method and the indirect method.

• The direct method adds up all the various types of cash payments and receipts, including cash paid to suppliers, cash receipts from customers and cash paid out in salaries. These figures are calculated by using the beginning and end balances of a variety of a business accounts and examining the net decrease or increase in the accounts.
• With the indirect method, cash flow from operating activities is calculated by first taking the net income off of a company's income statement. Because a company’s income statement is prepared on an accrual basis, revenue is only recognized when it is earned and not when it is received. Net income is not an accurate representation of net cash flow from operating activities, so it becomes necessary to adjust earnings before interest and taxes (EBIT) for items that affect net income, even though no actual cash has yet been received or paid against them. The indirect method also makes adjustments to add back non-operating activities that do not affect a company's operating cash flow.

For Example : Deprication is a non cash expense which is deducted to calculated the net income. While using indirect income method, it is added back to calculate the cash flows.