A cash flow statement is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company. It is used to assess a company’s ability to generate cash and meet its financial obligations. There are three main types of cash flow statements: the operating cash flow statement, the investing cash flow statement, and the financing cash flow statement. The operating cash flow statement shows the cash generated from a company’s main operations. This includes cash from sales, as well as cash used to pay for expenses. The investing cash flow statement shows the cash used to purchase and sell assets, such as equipment and property. The financing cash flow statement shows the cash used to raise capital and pay off debt.
Cash flow statements are important for a number of reasons. They can help companies identify areas where they are generating and using cash. By doing so, they can take steps to improve their financial performance. Cash flow statements can also be used to assess a company’s financial health. A company with a strong cash flow is more likely to be able to meet its financial obligations. Therefore, cash flow is useful for potential investors and creditors, since it can provide them with valuable information on the company’s liquidity.
The Direct Method
The direct method of preparing a cash flow statement shows the actual cash inflows and outflows for a period. This method is more difficult to prepare than the indirect method, but it is also more accurate.
To prepare a cash flow statement using the direct method, start by listing all of the cash inflows and outflows for the period. Then, categorize the inflows and outflows into the following three categories: operating activities, investing activities, and financing activities. Once you have categorized the inflows and outflows, you can calculate the net cash flow for each category. The net cash flow is the difference between the inflows and outflows for that category.
The following are some examples of cash inflows and outflows that would be included in a cash flow statement prepared using the direct method:
- Cash from sales
- Cash from investments
- Cash from borrowing
- Cash used to pay expenses
- Cash used to purchase assets
- Cash used to repay debt
The Indirect Method
The indirect method of preparing a cash flow statement starts with the net income for the period. Then, adjustments are made to the net income to account for non-cash items, such as depreciation and amortization. These adjustments are necessary in order to convert the net income to a cash basis.
The following are some examples of adjustments that would be made to the net income when preparing a cash flow statement using the indirect method:
- Add back depreciation and amortization
- Subtract any gains on the sale of assets
- Add back any losses on the sale of assets
- Subtract any increases in working capital
- Add back any decreases in working capital
Conclusion
Cash flow statements are an important tool for managing a business. By understanding how to prepare and use a cash flow statement, you can improve your company’s financial performance. There are two main methods for preparing a cash flow statement: the direct method and the indirect method. The direct method is more accurate, but the indirect method is easier to prepare. Choose the method that is best for your company and use it to track your cash flow on a regular basis.
A cash flow statement template UK can be a useful tool for businesses of all sizes. By using a template, you can ensure that your cash flow statement is accurate and complete. There are many different cash flow statement templates available online, so you can find one that meets your specific needs. Once you have found a template, simply enter your financial data and the template will automatically generate a cash flow statement.
