A statement of cash flows contains information about the flows of cash into and out of a company, and the uses to which the cash is put. The statement is comprised of three sections, in which are presented the cash flows that occurred during the reporting period relating to the following:
The statement of cash flows is part of the financial statements, and as such is heavily reviewed by the users of the financial statements.
The most commonly used format for the statement of cash flows is called the indirect method. The general layout of an indirect method statement of cash flows is shown below, along with an explanation of the source of the information in the statement. The sources of information appearing in the table can be used to prepare a cash flow statement.
ABC Company
Statement of Cash Flows (indirect method)
for the year ended 12/31/20X1
Line Item | Derivation |
Cash flows from operating activities | |
Net income | From the net income line on the income statement |
Adjustments for: | |
Depreciation and amortization | From the corresponding line items in the income statement |
Provision for losses on accounts receivable | From the change in the allowance for doubtful accounts in the period |
Gain/loss on sale of facility | From the gain/loss accounts in the income statement |
Increase/decrease in trade receivables | Change in trade receivables during the period, from the balance sheet |
Increase/decrease in inventories | Change in inventories during the period, from the balance sheet |
Increase/decrease in trade payables | Change in trade payables during the period, from the balance sheet |
Cash generated from operations | Summary of the preceding items in this section |
Cash flows from investing activities | |
Purchase of fixed assets | Itemized in the fixed asset accounts during the period |
Proceeds from sale of fixed assets | Itemized in the fixed asset accounts during the period |
Net cash used in investing activities | Summary of the preceding items in this section |
Cash flows from financing activities | |
Proceeds from issuance of common stock | Net increase in the common stock and additional paid-in capital accounts during the period |
Proceeds from issuance of long-term debt | Itemized in the long-term debt account during the period |
Dividends paid | Itemized in the retained earnings account during the period |
Net cash used in financing activities | Summary of the preceding items in this section |
Net change in cash and cash equivalents | Summary of all preceding subtotals |
A less commonly-used format for the statement of cash flows is the direct method. The general layout of the direct method statement of cash flows is shown below, along with an explanation of the source of the information in the statement. This information can be used to prepare a cash flow statement.
ABC Company
Statement of Cash Flows (direct method)
for the year ended 12/31/20X1
Line Item | Derivation |
Cash flows from operating activities | |
Cash receipts from customers | Summary of the cash receipts journal for the period |
Cash paid to suppliers | Summary of the cash disbursements journal for the period (less the financing payments noted below) |
Cash paid to employees | Summary of the payroll journal for the period |
Cash generated from operations | Summary of the preceding items in this section |
Interest paid | Itemized in the cash disbursements journal |
Income taxes paid | Itemized in the cash disbursements journal |
Net cash from operating activities | Summary of the preceding items in this section |
Cash flows from investing activities | |
Purchase of fixed assets | Itemized in the fixed asset accounts during the period |
Proceeds from sale of fixed assets | Itemized in the fixed asset accounts during the period |
Net cash used in investing activities | Summary of the preceding items in this section |
Cash flows from financing activities | |
Proceeds from issuance of common stock | Net increase in the common stock and additional paid-in capital accounts during the period |
Proceeds from issuance of long-term debt | Itemized in the long-term debt account during the period |
Principal payment under capital leases | Itemized in the capital leases liability account during the period |
Dividends paid | Itemized in the retained earnings account during the period |
Net cash used in financing activities | Summary of the preceding items in this section |
Net change in cash and cash equivalents | Summary of all preceding subtotals |
2 videos|51 docs|19 tests
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1. What is a cash flow statement and why is it important in financial analysis and reporting? |
2. What are the three main categories in a cash flow statement? |
3. How is the net cash flow from operating activities calculated in a cash flow statement? |
4. How can a cash flow statement help in assessing a company's liquidity? |
5. How can the information provided in a cash flow statement be useful for investors and creditors? |
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