Cash Flow Statement: What It Is and Examples

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Cash Flow Statement

A cash flow statement (CFS) is the financial statement used to measure inflow and outflow of cash. Actual cash flow of the firm is the most important item that can be extracted from financial statements. 

CFS helps to explain the change in accounting cash and cash equivalents. It helps in determining a company’s performance by providing information on its financial health and efficiency. CFS evaluates a firm’s ability to create enough cash flow to cover its operational costs and pay off its debt. In other words, it gauges how well a corporation manages its financial situation. The three main financial statements are Income statement, Balance sheet and Cash flow statement.

Importance of Cash Flow Statement

Provides information on spending:  

An understanding of the company’s primary payments to creditors can be obtained from a cash flow statement. It also provides cash transactions that are recorded but not shown in the other financial statements. These include purchase of capital goods, creditors, and purchasing inventory.ย 

Assists you in focusing on making cash: 

Profit, which generates cash, is essential for a firm’s success. However, there are plenty of alternative ways to earn cash. For example, when a business finds a means to reduce its equipment costs, it generates cash. It generates cash each time it collects receivables from clients more quickly than usual.

Maintains ideal cash balance: 

The ideal amount of cash on hand is maintained with the help of a cash flow statement. Determining if an excessive amount of cash is idle or whether there is an excess or shortfall in finances is crucial for the organization. If the company has extra cash on hand, it can invest it in stock or purchase merchandise. 

Helps in short term planning:

A profitable company must always have enough cash on hand to pay for impending bills and other short-term commitments. To make important decisions, a financial manager might examine cash inflows and outflows from previous transactions. Seeing a cash shortfall to pay off debts or establishing a base to apply for bank credit are a few situations where decisions must be made depending on cash flow.

How to determine Cash Flow Statement

The main components of Cash flow are- Cash flow from operating activities, Cash flow from investing activities and Cash flow from financing activities.

How To Determine Cash Flow Statement

Cash flow from operating activities

The main sources of revenue for the organization are its operating activities. Cash flows related to sales, purchases, and other expenses are usually included in the cash flow from operations. The chief financial officer (CFO) of the firm decides whether to present operating cash flow directly or indirectly:

Direct presentation: A list of cash flows, including cash from sales and cash out for operating expenses, is used to show operating cash flows. Although indirect presentation is more common, this approach is rarely used.

Indirect presentation: Reconciliation of profit to cash flow is how operating cash flows are presented indirectly. Usually, we assume that the indirect method is applied. Cash flow also includes non cash items to balance the profits of the firm.

Add: Depreciation and Amortization

Depreciation and Amortization are the expenses incurred due to the loss of value of the asset over a period of time. Depreciation includes tangible assets such as land, building, machinery, whereas amortization involves intangible assets such as goodwill, patents, software, etc.

They are subtracted from the income statement and as they are non-cash expenses therefore added back in the cash flow statement to adjust net income. 

Add/subtract: Changes in working capital

The difference between current assets and current liabilities is the change in working capital. The increase in current assets represents the outflow of cash, for example, increase in debtors. Hence, they are subtracted from the cash flow statement whereas decreases in assets are added to the cash flow statement as they denote the inflow of cash. 

In contrast, when current liabilities increase, say, accounts payable, they are added to the cash flow statement and subtracted when there is a decrease in current liabilities.

Cash flow from investing activities

Cash flow from investing activities includes changes in non-current assets. Examples of non-current assets are long term investments, land, machinery, property, plant and equipment. 

Subtract: Increase in non-current assets

Capital expenditures are amounts of money used to buy property, plant and equipment. Capital expenditures might take the form of buying new office supplies like printers and computers for an expanding workforce, or they can involve buying new property and a building to house the company’s operations and logistics. These things are required to keep the business functional. Since these investments represent a financial outflow, they will have a negative effect on the total amount of cash raised by all activities. 

Cash flow from financing activities

Changes in the company’s capital structure are included in cash flow from financing activities i.e. changes in non-current liabilities and changes in short term borrowings. The payment of dividends is also a part of financing activities. 

Add: Increase in non current liabilities

Non-current liabilities such as long-term loans, bonds payable, long term lease leads to inflow of cash and therefore they are added in the cash flow statement.

Subtract: Payment of dividends

Payment of dividends is reducing the cash and hence it is a cash outflow. Interest is paid to the bondholders so it will be subtracted from the cash flow statement. 

Cash Flow Statement Example- Apex Auto Components Pvt. Limited

Statement of profit and loss ending on 31st March(Rs. Million)
Sl. No.Particulars201520162017201820192020
1Revenue
1.1Gross Sales95481098012627151531818321820
1.2Excise Duties/GST7085100110120135
1.3Net Sales94781089512527150431806321685
1.4Other Income71012141825
1.5Total Revenue94851090512539150571808121710
2Expenses
2.1Operating Expense
2.1.1Consumption of Raw Materials640074158493101721212114502
2.1.2Consumption of Stores and Spares130149172206248297
2.1.3Power and Fuel57065575390510861304
2.1.4Rent300345397476572686
2.1.5Repair & Maintenance56781011
2.1.6Insurance & Taxes101113161923
2.1.7Other Manufacturing Expense374349597185
2.1.8Wages and Labour Compensation200300375402587776
2.1.9Depreciation & Amortization Expenses416165145200188168
2.2Purchase of Stock in Trade101113161923
2.3Change in Inventories
2.3.1WIP35(35)(100)(130)(169)(250)
2.3.2Finished Goods90(90)(15)(18)(22)(26)
2.4Salaries390378405534537574
2.5Finance Cost (Interest)290309264325442632
2.7Miscellaneous General & AdministrativeExpenses647585100115135
3Total Expenses8947973711056132711582418940
4Profit/(Loss) Before Tax53811681483178622572770
5Provision for Tax182370381449547656
6Profit/(Loss) After Tax3567981102133717102114
7Dividend (Including DDT)000000
8Retained Profit/ (Loss)3567981102133717102114
Balance Sheet as at 31st March (Rs.Million)
Sl. No.Particulars201520162017201820192020
AEquity & Liabilities
A1Shareholders’ Funds
A1.1.Share Capital202020204040
A1.2Reserves & Surplus151223103412474964598573
A1.3Total Shareholders Funds153223303432476964998613
A2Non Current Liabilities
A2.1Long Term Loans11958196197691069869
A2.2Loans & Advances from Related Parties608080808080
A2.3.Other Long Term Liabilities (Unsecured Loans)125242242242242242
A2.4Long Term Provisions434848484848
A.2.5Total Non Current Liabilities14231189989113914391239
A3Current Liabilities
A3.1Bank Borrowings for Working Capital60091491491410641214
A3.2Other Short Term Borrowings300300300300300300
A3.3Trade Payables84023853885528569858785
A3.4Short Term Provisions72758090105123
A3.5Other Current Liabilities356090125165210
A3.6Total Current Liabilities1847373452696714861910632
Total Liabilities & Equity480272539690126221655720484
BAssets
B1Non Current Assets
B1.1Gross Fixed assets317233723372397239723972
B.1.2Accumulated Depreciation159917641909210922972465
B1.3Net Fixed Assets157316081463186316751507
B1.4Capital Work in Progress000000
B1.5Intangible Assets000000
B1.6Non-Current Investments303030303030
B1.7Long Term Loans & Advances510510510510760760
B1.8Other Non Current Investments404040404040
B1.9Total Non Current Assets215321882043244325052337
B2Current Assets
B2.1Cash and Cash Equivalents1416071446145019922016
B2.2Inventories
B2.2.1Raw Materials70112011301145116511901
B2.2.2WIP85120220350519769
B2.2.3Finished Goods180270285303325351
B2.3Trade Receivables151023103210471067109510
B2.4Short Term Loans & Advances305301130183027303430
B2.5Other Current Assets2275585125170
B2.6Total Current Assets264950657647101791405218147
Total Assets480272539690126221655720484
Cash Flow Statement
1Cash Flow from Operation
1.1PAT7981102133717102114
1.2+Depreciation & Amortization165145200188168
1.3+Increase in Current Liabilities (Excluding Short term Borrowings)15731535144517551863
1.4-Increase in Current Assets (other than Cash & Cash Equivalents)19501743252833314071
1.5Total Cash Flow from Operating Activities586103945432274
2Cash Flow From Investments
2.1-Increase in Gross Block200060000
2.2-Increase in Capital WIP00000
2.3-Increase in Intangible Assets00000
2.4-Increase in Non Current Investments00000
2.5-Increase in Long Term Loans & Advances0002500
2.6-Increase in Other Non Current Assets00000
2.7Total Cash Flow from Investments-2000-600-2500
3Cash Flow from Financing
3.1+Increase in Share Capital000200
3.2-Payment of Dividends00000
3.3+Increase in Non Current Liabilities-234-200150300-200
3.4+Increase in Short Term Loans31400150150
3.5Total Cash Flow from Financing Activities80-200150470-50
4Total Cash Flow during the Period466839454224
5Opening Cash & Cash Equivalents141607144614501992
6Closing Cash & Cash Equivalents6071446145019922016

What is CashFlow Statement: Conclusion

To comprehend the company’s financial status, it is important to grasp several forms of cash flow. Operating cash flow is the amount of money created from operations before capital expenditures and working capital requirements are subtracted. Generally, it should be positive; if operating cash flow is negative for a long period of time, the company is having problems funding its operations because it is not making enough money. It will often be negative. During a period of rapid business expansion, fixed asset and inventory expenditures may surpass cash flow from sales. 

To conclude, the cash flow statement offers important information about the creation, use, and general financial health of a business. Stakeholders can decide on investment, financing, and operational plans with knowledge by examining the cash flow statement’s important elements and patterns. 

FAQs

Which method is better to calculate cash flow?

Indirect or direct methods are neither better nor worse. The indirect technique offers a way to match up items on the balance sheet with the income statement’s net income. An accountant can determine which balance sheet gains and declines are attributable to non-cash transactions when they create the CFS through the use of the indirect technique.
Gaining insight into the relationship and influence of the balance sheet accounts on the income statement’s net income can help make the financial statements more coherent.

What do cash and cash equivalents consist of?

On a companyโ€™s balance sheet, cash and cash equivalents are combined into one line item. It provides the value of a company’s assets that are cash-positive or have the potential to become cash in the near futureโ€”typically within 90 days. Currency, petty cash, bank accounts, and other extremely liquid, short-term assets are examples of cash and cash equivalents. Treasury bills, commercial paper, and short-term government bonds with a maturity of three months or less are a few examples of cash equivalents.

What types of cash flows are present in operations?

Cash inflows and outflows are recorded as revenues and expenses from operations including purchasing and selling supplies and inventories, making payroll, paying accounts payable, amortizing debt, and depreciating assets.

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