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A cash flow statement is a financial report that shows incoming and outgoing money during a particular period (often monthly or quarterly). The statement shows how changes in balance sheet and income accounts affected cash and cash equivalents and breaks the analysis down according to operating, investing, and financing activities. As an analytical tool the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7, is the International Accounting Standard that deals with cash flow statements
People and groups interested in cash flow statements include:
- Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses
- Potential lenders/creditors, who want a clear picture of a company's ability to repay
- Potential investors who need to judge whether the company is financially sound
- Potential employees or contractors who need to know whether the company will be able to afford compensation
Cash flow statements are particularly important for start-up companies with limited liquid assets. These companies are vulnerable to devastating cash shortages, even when Accounts Receivable balances point to long-term financial health.
Statement of Cash Flows
Statement of Cash Flow for the period 12/31/2005 to 12/31/2006 Cash flow from operations (CFO) +/- x x Cash flow from investing (CFI) +/- y y Cash flow from financing (CFF) +/- z z Equals change in cash account = change of cash flow + Beginning of period cash + Beginning cash = Ending cash balance = Ending cash
Operating activities
Operating activities include the production, sales and delivery of the company's product as well as collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising and shipping the product.
Items under Operating activities include:
- Net income from income statement
- Depreciation
- Non-cash items
- Deferred tax
- Interest amortization
- Accrual items, such as wages payable
Investing activities
Investing activities focus on the purchase of the long-term assets a company needs in order to make and sell its products, and the selling of any long-term assets that are no longer needed by the company.
Items under Investing Activities include:
Financing activities
Financing activities include the influx of cash from investors such as banks and shareholders, as well as the outflow of cash to investors as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities section of the cash flow statement.
Items under the Financing activities section include:
Preparation methods
Direct Method
Shows the major classes of gross cash receipts and payments. This method starts with sales and mirrors the Income Statement while also including Current Assets and Current Liabilities.Indirect Method
Shows the net profit or loss as a starting point and makes adjustments for all transactions of a non-cash itemExample 1
| Transaction | In | Out |
|---|---|---|
| Incoming Loan | +$50.00 | |
| Sales (which were paid for in cash) | +$30.00 | |
| Materials | -$10.00 | |
| Labor | -$10.00 | |
| Purchased Capital | -$10.00 | |
| Loan Repayment | -$5.00 | |
| Taxes | -$5.00 |
| Total.......................................... | ......+$40.00...... |
|---|
The cash flow for this example is +$40.00.
Example 2
Citigroup Incorporated cash flow: (([http://www.citigroup.com/citigroup/fin/ar.htm)
| Period Ending | 31-Dec-03 |
|---|---|
| Operating Activities, Cash Flows Provided By or Used In | |
| Net Income | 17,853 |
| Adjustments To Net Income | 13,260 |
| Depreciation | 2,121 |
| Changes in Account Receivables | 14,188 |
| Changes In Liabilities | 31,571 |
| Changes In Inventories | - |
| Changes In Other Operating Activities | (93,847) |
| Total Cash Flow From Operating Activities | (14,854) |
| Investing Activities, Cash Flows Provided By or Used In | |
| Capital Expenditures | (2,354) |
| Investments | (23,757) |
| Other Cashflows from Investing Activities | (20,196) |
| Total Cash Flows From Investing Activities | (46,307) |
| Financing Activities, Cash Flows Provided By or Used In | |
| Dividends Paid | 5,773 |
| Treasury stock acquired Paid | (2,416) |
| Issuance of long-term debt | 67,054 |
| Payments and redemptions of long-term debt | (45,800) |
| Change in deposits | 42,136 |
| Contractholder fund deposits | 8,346 |
| Contractholder fund withdrawals | (5,976) |
| Cash flows from financing activities of continuing operations | 64,405 |
| Effect of exchange rate changes on cash and cash equivalents | 579 |
| Change in cash and due from banks | $3,823 |
See also
How can a Dividend Paid be an inflow?
External links
Further reading:
- Cash Flow Statement Explanation with Examples.
Generally Accepted Accounting Principles
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"Cash flow statement"