The balance sheet, income statement, and cash flow statement are the three generally accepted financial statements used by most businesses for financial reporting.The purpose of the cash flow statement is to report the sources and uses of cash during the reporting period.
Structure of the Cash Flow Statement
The most commonly used format for the cash flow statement is broken down into three sections:
- Cash flows from operating activities
- Cash flows from investing activities
- Cash flows from financing activities.
Cash flows from operating activities are related to your principal line of business and include the following:
- Cash receipts from sales
- Payroll and other payments to employees
- Payments to suppliers and contractors
- Rent payments
- Payments for utilities
- Tax payments
Investing activities include capital expenditures . Investing activities also include investments (other than cash equivalents as indicated below) that are not part of your normal line of business. These cash flows could include:
- Purchases of property, plant and equipment
- Proceeds from the sale of property, plant and equipment
- Purchases of stock or other securities (other than cash equivalents)
- Proceeds from the sale or redemption of investments
Financing activities include cash flows relating to the business’s debt or equity financing:
- Proceeds from loans, notes, and other debt instruments
- Installment payments on loans or other repayment of debts
- Cash received from the issuance of stock or equity in the business
- Dividend payments, purchases of treasury stock, or returns of capital
the cash flow statement normally includes cash and cash equivalents. Cash equivalents are short-term, temporary investments that can be readily converted into cash, such as marketable securities, short-term certificates of deposit, treasury bills, and commercial paper. The cash flow statement shows the opening balance in cash and cash equivalents for the reporting period, the net cash provided by or used in each one of the categories (operating, investing, and financing activities), the net increase or decrease in cash and cash equivalents for the period, and the ending balance.
There are two methods for preparing the cash flow statement –
- Direct method.
- Indirect method.
Direct Method
Under the direct method, you are basically analyzing your cash and bank accounts to identify cash flows during the period. You could use a detailed general ledger report showing all the entries to the cash and bank accounts. You would then determine the offsetting entry for each cash entry in order to determine where each cash movement should be reported on the cash flow statement.
. Some examples for the operating activities section include:
Cash receipts from customers:
- Net sales per the income statement
- Plus beginning balance in accounts receivable
- Minus ending balance in accounts receivable
- Equals cash receipts from customers
Cash payments for inventory:
- Ending inventory
- Minus beginning inventory
- Plus beginning balance in accounts payable to vendors
- Minus ending balance in accounts payable to vendors
- Equals cash payments for inventory
Cash paid to employees:
- Salaries and wages per the income statement
- Plus increase in salaries and wages payable
- Minus decrease in salaries and wages payable
- Equals cash paid to employees
Cash paid for operating expenses:
- Operating expenses per the income statement
- Minus depreciation expenses
- Plus increase or minus decrease in prepaid expenses
- Plus decrease or minus increase in accrued expenses
- Equals cash paid for operating expenses
Taxes paid:
- Tax expense per the income statement
- Plus increase in taxes payable
- Minus decrease in taxes payable
- Equals taxes paid
Interest paid:
- Interest expense per the income statement
- Plus increase in interest payable
- Minus decrease in interest payable
- Equals interest paid
Under the direct method, for this example, you would then report the following in the cash flows from operating activities section of the cash flow statement:
- Cash receipts from customers
- Cash payments for inventory
- Cash paid to employees
- Cash paid for operating expenses
- Taxes paid
- Interest paid
- Equals net cash provided by operating activities
Similar types of calculations can be made of the balance sheet accounts to eliminate the effects of accrual accounting and determine the cash flows to be reported in the investing activities and financing activities sections of the cash flow statement.
Indirect Method
In preparing the cash flows from operating activities section under the indirect method, you start with net income per the income statement, reverse out entries to income and expense accounts that do not involve a cash movement, and show the change in net working capital. Entries that affect net income but do not represent cash flows could include income you have earned but not yet received, amortization of prepaid expenses, accrued expenses, and depreciation or amortization. Under this method you are basically analyzing your income and expense accounts. The following is an example of how the indirect method would be presented on the cash flow statement:
- Net income per the income statement
- Minus entries to income accounts that do not represent cash flows
- Plus entries to expense accounts that do not represent cash flows
- Equals cash flows before movements in working capital
- Plus or minus the change in working capital, as follows:
No comments:
Post a Comment