A cash flow statement in detail provides information on the property assets and liquidity of a business. With the statement, the feasibility of a business's ability to pay bills, repay debts, and attend to other expenses is determined.
What is a cash flow statement?
A cash flow statement reports the financial transactions of a business which entails both an income statement and a balance sheet. It reveals how money flowed in and out of a business within a period which ranges from a month to year or quarterly at times.
Statement of cash flows which is an alternative for cash flow statements is categorized into three major sections:
1. Operating Activities
This section encompasses the cash flow related to the production/ sales of a business. The activities that generate revenues which as well includes raw material purchase, advertisement, and product shipping and delivery. Examples are cash paid to suppliers and employees.
It, however, excludes the costs of long-term investment in capital commodities. It tells the difference between cash from customers and what is paid to the suppliers. Cash flow for operating activities is calculated and presented as either a direct or indirect method.
In the direct cash flows, operating activities are calculated by compiling the receipt from customers, of money paid to suppliers, employers, and cash out from capital expenditures is inclusive.
The Indirect method cash flow statement requires less information compared to the direct. It includes net income and deduction from non-cash revenue as well expenses. In compliance with the US accounting standard, the indirect method should be included in a cash flow statement. Although both the direct and indirect methods can be used to show statements of cash flow. As for investing and financial activities, the statement is identical, leaving the operating as the only different part. It's good to note that despite the difference in presentation, both the direct and indirect methods give the same results.
2. Investing Activities
It's cash flow resulting from the purchase or sales of assets. It will also include any investment not regarded as cash equivalents. Examples are proceeds from equipment sales and received dividends.
3. Financial Activities
It's the cash flow in the form of inflow or outflow of cash. Inflow from investors and outflow from the payment of dividends. An example is a dividend paid.
Cash Flow and Interest
According to the IFRS, interest expense in the cash flow statement can be presented in two ways. Some businesses categorize both received and paid interest as operating cash flows. While for some, the former (received interest) is categorized as investing cash flow and the latter as financing cash flow. In accordance with GAAP, received and paid interest are under the operating cash flows.
Free Cash Flow
Free cash flow is usable and calculated in different ways. Professionals employ it for different uses. It comes in handy for analysts to evaluate a business and know the amount that can be removed from a business without compromising day-to-day operations. It shows the ease of
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