Cash-Flows statement

Cash-Flows statement…Step by Step

 In today's environment, any accountant, expert or beginner, needs to obtain a good background of the four basic financial statements needed for any business:

1)     Income Statement

2)   Owner's (Stockholders') Equity Statement

3)    Balance Sheet, and

4)   Statement of Cash-Flows

In this article we will focus on the statement of Cash-Flows, how to build it, and why we need it.

Statement of Cash-Flows as a management tool

Any business, a large one or a startup, needs to produce new goods and services and expend it into new markets continually. To achieve this, the firm will be in need to huge amounts of cash. However, getting cash only is the point, but how to manage it is where we should focus on.

Large-scale companies tend to accumulate cash to invest in new business opportunities, buy other companies or buy certain amounts of other businesses shares.

In spite of their importance, the balance sheet, income statement and retained earnings statement do not always show the whole picture of the financial situation of a specific company. They provide only limited information about the company's cash flow, in terms of both receipts and payments. The income statement, for instance, shows only the net income, but how this income is generated and what activities are involved in both inflows and outflows activities of cash, this can be viewed inside the statement of Cash-Flows.

Benefits of the statement of Cash-Flows

The statement of Cash-Flows reports both cash receipts and cash payments, it reflects the net change in cash resulting from three types of activities: operating, investing and financing activities, during a specific period of time.

Investors can use the statement of Cash-Flows as an indicator for potential cash flows generated by the firm; they can observe the relationship between its items, in order to make predictions of the amounts, timing and uncertainty of future cash flows of a certain business.

Statement of Cash-Flows Activities

Transactions can be classified into three categories of activities inside the statement of Cash-Flows (either cash receipts or cash payments) as follows:

(1)             Operating activities: involve income statement items.

a.     Cash Inflows: Resulting from:

                                                             i.      Sales of goods or services

                                                          ii.      Interest and dividends received

b.    Cash Outflows: Paid to:

                                                             i.      Suppliers for inventory

(2)            Investing Activities: involve changes in investments and long-term assets.

a.     Cash Inflows: Resulting from:

                                                             i.      Sale of PPE (Property, Plant and Equipment)

                                                          ii.      Sale of investments in debt or equity securities of other entities

                                                       iii.      Collection of principal on loans to others entities

b.    Cash Outflows: paid to:

                                                             i.      Purchase of PPE

                                                          ii.      Purchase of investments in debt or equity securities of other entities

                                                       iii.      Make loans to other entities

(3)            Financing activities: Involves change in long-term liabilities and stockholders' equity.

a.     Cash Inflows: resulting from:

                                                             i.      Sale of common stock

                                                          ii.      Issuance of long-term debt (bonds and notes)

b.    Cash Outflows: paid to:

                                                             i.      Stockholders as dividends

                                                          ii.      Redeem long-term debt or reacquire capital stock (treasury stock)

Skeleton of the Statement of Cash Flows

Company Name Statement of Cash Flows For the Year Ended December 31, 201…
Cash flow from operating activities Net income Adjustments to reconcile net income Depreciation expense Increase in accounts receivable Decrease in accounts payable Decrease in inventories Net cash flow provided by operating activities Cash flow from investing activities Sale of land Purchase of equipment Net cash flow used by investing activities Cash flow from financing activities Issuance of common stock Decrease in bonds payable Dividends paid Net cash flow used by financing activities Net increase in cash Cash at beginning of year Cash at end of year
Non-cash investing and financing activities Retirement of Bonds payable through issuance of common stock.

Significant Non-Cash activities

As mentioned in the last section of the above table, there is another type of activities to calculate in the statement of Cash-Flows, which we call the Non-Cash activities. Examples of Non-Cash activities are:

·        Direct issuance of common stock to purchase assets

·        Conversion of bonds onto common stock

·        Direct issuance of debt to purchase assets\exchange of plant assets