Complete Cash Flow Statement | Definition | Explanation | Examples
A cash flow statement is used to determine the cash that enters and leaves your business. After the balance sheet & income statements, the cash flow statement is 3rd most key financial statement for maintaining your accounts.
What is a Cash Flow Statement?
A regular financial statement that helps in calculating the cash on hand during a specific period is the cash flow statement.
Income statements determine the money spent & earned but they will necessarily not tell you the cash on hand during a specific time.
Even, accrual accounting will record income & expenses only when they are earned or incurred. It will not be recorded when money enters or leave the bank.
What is the need for a Cash Flow Statement?
Cash Flow Statements are needed for 3 main reasons:
- Show the liquidity to know the operating cash flow for determining what to afford & what not to
- Show the changes in equity, assets, and liability in the form of cash inflows, outflows & cash held
- Helps in predicting future cash flow to create cash flow projections for making long-term business plans
What is Cash Flow Statement Format?
A company’s cash flow can be presented in 2 formats:
- Indirect Format
- Starts from net income in the income statement and adjustments made for accounts receivable, payable & depreciation, etc. that calculates cash flow from the operating activities
- Most commonly preferred and used by businesses
- Direct Format
- List different types of cash received from the customers and that cash paid to vendors or employees
- Recommended by IASB (International Accounting Standards Board)
Cash Flow Statement Example
Let us consider a company’s month ended cash flow statement
|Cash Flow Statement
Month Ended January 31, 2020
I. Operating Cash Flow
|Increase in Accounts Payable
Cash Subtraction for Increase in
Net Cash Flow from Operations
|II. Investing Cash Flow
III. Financing Cash Flow
Cash Flow for December 31, 2019
In the above example, note that the cash flow statement has been divided into 3 sections as Cash Flow from
- Operating Activities representing cash spend/earned in course of regular business
- Investing Activities representing cash spend/earned from investments
- Financing Activities representing cash spend/earned in course of financing a company with credits or loan
Also, negative cash flow in the above example denotes cash outflow or loss. Positive cash flow represents the money flowing into the business.
How to prepare a Cash Flow Statement?
Step 1: Open an Excel spreadsheet and enter the net income & cash balance at the start of your tracking period
Step 2: Mark inflows with a positive sign & outflows as negative
Step 3: Verify whether you have entered all incomes and expenditures for the analysis period
Step 4: Add all sections and total balance to have the final cash balance
Step 5: Subtract your starting balance from the ending balance to know whether the cash flow is positive or negative for a specific period
Ending cash balance = Cash flow from Operating Activities + (- Cash flow from Investing Activities) + Cash flow from Financing Activities + Beginning Cash Balance