What Is a Cash Flow Statement?
A Cash Flow Statement according to Investopedia is:
a financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources. It also includes all cash outflows that pay for business activities and investments during a given period.Investopedia
The cash flow statement (CFS) shows how successfully a business controls its cash balance or how effectively it generates cash to pay debts and support operational expenditures. The balance sheet and income statement are enhanced by the cash flow statement.
Categorizations of Cash Flows
1. Operating Cash Flow
The entity’s primary revenue-generating operations are its operating activities. The cash flows connected with sales, purchases, and other expenditures are often included in cash flow from operations.
2. Investing Cash Flow
Cash flow from investing operations covers the purchase and sale of non-current assets as well as other investments that are not included in cash equivalents.
3. Cash Flow Financing
Financing cash flows often comprise cash flows from obtaining and repaying bank loans, as well as offering and repurchasing stock. Dividend payments are sometimes considered financing cash flows.
The Direct and Indirect Methods of Calculating Cash Flow
You have two options for calculating your business’s cash flow; the direct technique or the indirect technique. While both are approved by Generally Accepted Accounting Principles (GAAP), small businesses normally prefer the indirect method.
1. The Direct Method
The direct technique of preparing a cash flow statement covers the primary categories of gross cash collections and payments.
Using the direct approach, you keep track of cash as it comes and goes out of your business then use that data to generate a cash flow statement at the end of the month.
The direct method necessitates more effort and discipline than the indirect method since you must generate and record cash receipts for each cash transaction. As a result, smaller businesses usually chose the indirect method.
2. The Direct Method
The indirect method begins with net income, then adjusts for all non-cash transactions before adjusting for all cash-based transactions. Increases in asset accounts are deducted from net income, whereas increases in liability accounts are put back in.
Using a sequence of additions and subtraction, this approach turns accumulative net income (or loss) into cash flow.
What are the benefits of cash flow statements?
1. They indicate your financial strength. That implies you’ll always know how much operating cash flow you have in case you need it.
2. They display changes in assets, liabilities, and equity as cash outflows, cash inflows, and cash kept. These three categories are the foundation of your financial statements.
3. Cash flow statements may be used to generate cash flow forecasts, allowing you to predict how much liquidity your company will have in the future.
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