Accountancy/Cash Flow Statement

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This is a part of the financial statement required by law or the accounting standard.

A cash flows statement provides information beyond that available from other financial statement such as the Income Statement and the Balance Sheet. It is an important information because cash flow is essential to the continued operation of a business. The main purpose of the statement, according to the Financial Accounting Standard Board (FASB) is to provide:

  • Information about the changes of an entity cash or cash equivalents in the accounting period.
  • Information about a company borrowing and debts repayment activities.
  • The company sale and repurchase of its ownership securities.
  • Other factors affecting the company's liquidity and solvency.

The normal format of The Cash Flow Statement is:

Statement of Cash Flows for the period 1/1/2005 to 31/12/2005.

Debit +/- Credit +/-
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers and empoyees
Balance c/d
Cash flow from investing activities
Cash flow from financing activities
Net increase/decrease/Change in the cash and cash equivalents
Cash and cash equivalents at the beginning of period
Cash and cash equivalents at the end of period

Each of the above headings will have further details, such as Cash flow from operations with increase in account receivables, accounts payables, cash receipts from customers, payment for goods sold and operating expenses. The investing cash flow includes capital expenditures for long-term assets, sales of assets and investing in joint ventures etc. Financing cash flow includes debts financing, dispensing ownership funds and borrowings.

When activities that do not involve cash they are not normally disclosed on the statement, BUT the Standard requires such transactions to be disclosed by way of footnotes or on a separate schedule.

The importance of the Cash Flow Statement for investment decision making includes:

  • Regular operations is sustainable or not.
  • Sufficient cash generated to pay debts or not.
  • The likelihood that the company needs further financing.
  • Can unexpected obligations or opportunities be taken up by the company without difficulty.

cash-flow determination from two year's balance sheets, change in equity , and a detailed income statement[edit]

Using a divide-and-conquer technique, it may be possible to determine a cash flow statement from knowing a beginning balance sheet, an ending balance sheet, a change in equity statement, and a detailed income statement. Even if there is not enough detail to calculate exactly, it helps to correlate that the statements are consistent.

The first division is to divide cash flow into operating, investing and financing activities. Cash flow from :-

  • operating activities - this can be seen by calculating changes in the current assets and current liabilities, and from operating income and expenses in the income statement. Payment of interest on borrowings is regarded as an operating activity, as interest is a current liability arising out of a non-current liability.
  • investing activities - these deal with changes in non-current assets , such as property and equipment, and investment of cash , such as shares, foreign currency, government bonds - and return on investment such as dividends from invested other entities and gains from sale of non-current assets , which can be seen in the investing income part of the income statement.
  • financing activities - cash may be generated from creation of company shares, and used in buybacks of company shares, payment of dividends on company shares, borrowing cash, and repayment of cash, and these can be seen in changes in non-current liabilities, and in changes in equity in the change-in-equity statement. e.g. Repayment of a long-term debt from retained profits is a outgoing cashflow; dividends is a form of drawings and is a equity distribution cash flow; issuing discounts is regarded as a finance expense, but there is no cash flow.

Why separate current and non-current, and separate non-current asset cash flow from non-current liability cash flow ? Separating current from non-current helps to see if there is enough easily accessible cash for day-to-day operations : separating long-term assets from long-term liabilities may help to predict longer term cash flow problems. However, cash flow statements are more useful when seen in the entire series: for instance, the first cash flow statement of the company may show a large incoming cash flow from borrowing in the financial section; then subsequent cash flow statements show the company purchasing non-current assets with outgoing cash flow; not knowing about the first borrowing cash flow makes the company look good.