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In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7) is the International Accounting Standard that deals with cash flow statements.
People and groups interested in cash flow statements include:
|Statement of Cash Flow - Simple Example|
for the period 1 Jan 2006 to 31 Dec 2006
|Cash flow from operations||$4,000|
|Cash flow from investing||($1,000)|
|Cash flow from financing||($2,000)|
|Net cash flow||$1,000|
|Parentheses indicate negative values|
The cash flow statement (previously known as the flow of funds statement), shows the sources of a company's cash flow and how it was used over a specific time period. It is an important indicator of a company's financial health, because a company can report a profit on its income statement, but at the same time have insufficient cash to operate. The cash flow statement reveals the quality of a company's earnings (i.e. how much came from cash flow as opposed to accounting treatment), and the firm's capacity to pay interest and dividends.
The cash flow statement differs from the balance sheet and income statement in that it excludes non-cash transactions required by accrual basis accounting, such as depreciation, deferred income taxes, write-offs on bad debts and sales on credit where receivables have not yet been collected.
The cash flow statement is intended to: 
Cash basis financial statements were very common before accrual basis financial statements. The "flow of funds" statements of the past were cash flow statements.
In 1863, the Dowlais Iron Company had recovered from a business slump, but had no cash to invest for a new blast furnace, despite having made a profit. To explain why there were no funds to invest, the manager made a new financial statement that was called a comparison balance sheet, which showed that the company was holding too much inventory. This new financial statement was the genesis of the cash flow statement that is used today.
In the United States in 1973, the Financial Accounting Standards Board (FASB) defined rules that made it mandatory under Generally Accepted Accounting Principles (US GAAP) to report sources and uses of funds, but the definition of "funds" was not clear. Net working capital might be cash or might be the difference between current assets and current liabilities. From the late 1970 to the mid-1980s, the FASB discussed the usefulness of predicting future cash flows. In 1987, FASB Statement No. 95 (FAS 95) mandated that firms provide cash flow statements. In 1992, the International Accounting Standards Board (IASB) issued International Accounting Standard 7 (IAS 7), Cash Flow Statement, which became effective in 1994, mandating that firms provide cash flow statements.
US GAAP and IAS 7 rules for cash flow statements are similar, but some of the differences are:
International Accounting Standard 7 specifies the cash flows and adjustments to be included under each of the major activity categories.
Operating activities include the production, sales and delivery of the company's product as well as collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising, and shipping the product.
Operating cash flows include:
Items which are added back to (or subtracted from, as appropriate) net income (which is found on the Income Statement) to arrive at cash flows from operations generally include:
Examples of investing activities are:
Financing activities include inflows and outflows of cash between investors and the company, such as:
Under IAS 7, non-cash investing and financing activities are disclosed in footnotes to the financial statements. Under US General Accepted Accounting Principles (GAAP), non-cash activities may be disclosed in a footnote or within the cash flow statement itself. Non-cash financing activities may include:
The direct method of preparing a cash flow statement results in a more easily understood report. The indirect method is almost universally used, because FAS 95 requires a supplementary report similar to the indirect method if a company chooses to use the direct method.
The direct method for creating a cash flow statement reports major classes of gross cash receipts and payments. Under IAS 7, dividends received may be reported under operating activities or under investing activities. If taxes paid are directly linked to operating activities, they are reported under operating activities; if the taxes are directly linked to investing activities or financing activities, they are reported under investing or financing activities. Generally Accepted Accounting Principles (GAAP) vary from International Financial Reporting Standards in that under GAAP rules, dividends received from a company's investing activities is reported as an "operating activity," not an "investing activity."
Sample cash flow statement using the direct method
|Cash flows from (used in) operating activities|
|Cash receipts from customers||9,500|
|Cash paid to suppliers and employees||(2,000)|
|Cash generated from operations (sum)||7,500|
|Income taxes paid||(3,000)|
|Net cash flows from operating activities||2,500|
|Cash flows from (used in) investing activities|
|Proceeds from the sale of equipment||7,500|
|Net cash flows from investing activities||10,500|
|Cash flows from (used in) financing activities|
|Net cash flows used in financing activities||(2,500)|
|Net increase in cash and cash equivalents||10,500|
|Cash and cash equivalents, beginning of year||1,000|
|Cash and cash equivalents, end of year||$11,500|
The indirect method uses net-income as a starting point, makes adjustments for all transactions for non-cash items, then adjusts from all cash-based transactions. An increase in an asset account is subtracted from net income, and an increase in a liability account is added back to net income. This method converts accrual-basis net income (or loss) into cash flow by using a series of additions and deductions.
|To Find Cash Flows|
from Operating Activities
using the Balance Sheet and Net Income
|For Increases in||Net Inc Adj|
|Current Assets (Non-Cash)||Decrease|
|For All Non-Cash...|
|*Expenses (Decreases in Fixed Assets)||Increase|
The following rules can be followed to calculate Cash Flows from Operating Activities when given only a two-year comparative balance sheet and the Net Income figure. Cash Flows from Operating Activities can be found by adjusting Net Income relative to the change in beginning and ending balances of Current Assets, Current Liabilities, and sometimes Long Term Assets. When comparing the change in long term assets over a year, the accountant must be certain that these changes were caused entirely by their devaluation rather than purchases or sales (i.e. they must be operating items not providing or using cash) or if they are non-operating items.
The intricacies of this procedure might be seen as,
For example, consider a company that has a net income of $100 this year, and its A/R increased by $25 since the beginning of the year. If the balances of all other current assets, long term assets and current liabilities did not change over the year, the cash flows could be determined by the rules above as $100 – $25 = Cash Flows from Operating Activities = $75. The logic is that, if the company made $100 that year (net income), and they are using the accrual accounting system (not cash based) then any income they generated that year which has not yet been paid for in cash should be subtracted from the net income figure in order to find cash flows from operating activities. And the increase in A/R meant that $25 of sales occurred on credit and have not yet been paid for in cash.
In the case of finding Cash Flows when there is a change in a fixed asset account, say the Buildings and Equipment account decreases, the change is added back to Net Income. The reasoning behind this is that because Net Income is calculated by, Net Income = Rev - Cogs - Depreciation Exp - Other Exp then the Net Income figure will be decreased by the building's depreciation that year. This depreciation is not associated with an exchange of cash, therefore the depreciation is added back into net income to remove the non-cash activity.
Finding the Cash Flows from Financing Activities is much more intuitive and needs little explanation. Generally, the things to account for are financing activities:
In the case of more advanced accounting situations, such as when dealing with subsidiaries, the accountant must
A traditional equation for this might look something like,
Example: cash flow of XYZ:
|XYZ co. Ltd. Cash Flow Statement|
(all numbers in millions of Rs.)
|Period ending||31 Mar 2010||31 Mar 2009||31 Mar 2008|
|Operating activities, cash flows provided by or used in:|
|Depreciation and amortization||2,790||2,592||2,747|
|Adjustments to net income||4,617||621||2,910|
|Decrease (increase) in accounts receivable||12,503||17,236||--|
|Increase (decrease) in liabilities (A/P, taxes payable)||131,622||19,822||37,856|
|Decrease (increase) in inventories||--||--||--|
|Increase (decrease) in other operating activities||(173,057)||(33,061)||(62,963)|
|Net cash flow from operating activities||13||31,799||(2,404)|
|Investing activities, cash flows provided by or used in:|
|Other cash flows from investing activities||1,606||17,009||(571)|
|Net cash flows from investing activities||(204,206)||(58,425)||(79,231)|
|Financing activities, cash flows provided by or used in:|
|Sale (repurchase) of stock||(5,327)||(12,090)||133|
|Increase (decrease) in debt||101,122||26,651||21,204|
|Other cash flows from financing activities||120,461||27,910||70,349|
|Net cash flows from financing activities||206,430||33,283||83,311|
|Effect of exchange rate changes||645||(1,840)||731|
|Net increase (decrease) in cash and cash equivalents||2,882||4,817||2,407|
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