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A cash flow statement is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company. The cash flow statement measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses. The cash flow statement complements the balance sheet and income statement and is a mandatory part of a company's financial reports.
The structure of the cash flow statement or the main components of the cash flow statement are:
- Operating Activities - these are the principal revenue-generating activities of an organization and other activities that are not investing or financing; any cash flows from current assets and current liabilities.
- Investing Activities - these are any cash flows from the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
- Financing Activities - these are any cash flows that result in changes in the size and composition of the contributed equity capital or borrowings of the entity (i.e., bonds, stock and dividend; a dividend is a share of profits and retained earnings that a company pays out to its shareholders).
Calculating Cash Flow
Cash flow is calculated by making certain adjustments to net income by adding or subtracting differences in revenue, expenses, and credit transactions (appearing on the balance sheet and income statement) resulting from transactions that occur from one period to the next. These adjustments are made because non-cash items are calculated into net income (income statement) and total assets and liabilities (balance sheet). So, because not all transactions involve actual cash items, many items have to be re-evaluated when calculating cash flow from operations.
As a result, there are two methods of calculating cash flow: the direct method and the indirect method.
Direct Cash Flow Method
The direct method adds up all the various types of cash payments and receipts, including cash paid to suppliers, cash receipts from customers, and cash paid out in salaries. These figures are calculated by using the beginning and ending balances of a variety of business accounts and examining the net decrease or increase in the accounts.
Direct Method Statement of Cash Flows Example
| "$\color{black}{\text{Cash Flow Statement as at January 31st, 2020}}$" | ||
| "$\color{black}{\text{Operating Activities}}$" | ||
| "$\text{Receipts from Customers}$" | "$\text{9,600}$" | |
| "$\text{Payments to Suppliers}$" | "$\text{(6,000)}$" | |
| "$\text{Payments to Employees}$" | "$\text{(2,500)}$" | |
| "$\text{Interest Payments}$" | "$\text{(500)}$" | |
| "$\color{black}{\text{Total Cash from Operations}}$" | "$\color{black}{\text{600}}$" | |
| "$\text{Investing Activities}$" | ||
| "$\text{Renovations}$" | "$\text{(25,000)}$" | |
| "$\text{Cash from Investing}$" | "$\text{ }$" | "$\text{(25,000)}$" |
| "$\text{Financing Activities}$" | ||
| "$\text{Issuance of Common Bonds}$" | "$\text{50,000}$" | |
| "$\text{Issuance of Long-term Liability}$" | "$\text{24,500}$" | |
| "$\text{Dividends Paid}$" | "$\text{(500)}$" | |
| "$\text{Cash from Financing}$" | "$\text{74,000}$" | |
| "$\text{Net Increase or Decrease in Cashflow}$" | "$\text{49,600}$" | |
| "$\text{Opening Cash}$" | ||
| "$\text{Closing Cash}$" | "$\text{49,600}$" | |
Indirect Cash Flow Method
With the indirect method, cash flow from operating activities is calculated by first taking the net income off of a company's income statement. Because a company’s income statement is prepared on an accrual basis, revenue is only recognized when it is earned and not when it is received. Net income is not an accurate representation of net cash flow from operating activities, so it becomes necessary to adjust earnings before interest and taxes (EBIT) for items that affect net income, even though no actual cash has yet been received or paid against them. The indirect method also makes adjustments to add back non-operating activities that do not affect a company's operating cash flow.
For example, depreciation is not really a cash expense; it is an amount that is deducted from the total value of an asset that has previously been accounted for. That is why it is added back into net sales for calculating cash flow.
Example
Cash flow statement presented according to the indirect method.
| "$\text{Consolidated Statement of Cash Flows}$" | ||
| "$\text{August 2020}$" | "$\text{August 2019}$" | |
| Operating Activities | ||
| "$\text{Net Earnings}$" | "$\text{1,974}$" | "$\text{1,733}$" |
| "$\text{Net Earnings of Discontinued Operations}$" | "$\text{0}$" | "$\text{3}$" |
| "$\text{Net Earnings of Continuing Operations}$" | "$\text{1,974}$" | "$\text{1,730}$" |
| "$\text{Adjustments to Reconcile Net Earnings to Cash provided by Operations}$" | ||
| "$\text{Depreciation and Amortization}$" | "$\text{1,245}$" | "$\text{1,267}$" |
| "$\text{Non Cash Gains/Losses}$" | "$\text{86}$" | "$\text{42}$" |
| "$\text{Changes in Operating Accounts}$" | ||
| "$\text{Inventory}$" | "$\text{116}$" | "$\text{375}$" |
| "$\text{Other Assets}$" | "$\text{(14)}$" | "$\text{64}$" |
| "$\text{Accounts Payable}$" | "$\text{795}$" | "$\text{(731)}$" |
| "$\text{Accrual and other Liabilities}$" | "$\text{822}$" | "$\text{(127)}$" |
| "$\text{Cash Provided by Operating Activities – Continuing Operations}$" | "$\text{5,024}$" | "$\text{2,620}$" |
| "$\text{Cash Provided by Operating Activities – Discontinued Operations}$" | "$\text{92}$" | "$\text{2}$" |
| "$\text{Cash Provided by Operations}$" | "$\text{5,116}$" | "$\text{2,622}$" |