Cash flow state­ments are an ac­count­ing procedure in which the inflow and outflow of cash are clearly mapped out. The main focus is the question of how a company’s finances have changed over the course of a year. The statement aims to provide a trans­par­ent pre­sen­ta­tion of all the funds ac­cu­mu­lat­ed by a company as well as how they’re used. The cash flow statement provides in­for­ma­tion on how prepared a company is to generate surpluses, meet payment oblig­a­tions, and make dis­tri­b­u­tions to share­hold­ers. In short, cash flow ac­count­ing is a method of analyzing changes in cash and cash equiv­a­lents during a period of time.

Fact

The finances of companies are defined as the stock of its cash and cash equiv­a­lents. Cash includes all paper cash as well as bank deposits that the company can access at any time (demand deposits). Cash equiv­a­lents include short-term, highly liquid financial in­vest­ments that are readily con­vert­ible to a known amount of cash, and are only subject to in­signif­i­cant value fluc­tu­a­tion risks.

Term clar­i­fi­ca­tion: Cash flow statement

Strictly speaking, the term “cash flow statement” is mis­lead­ing—in addition to financial data, a company’s capital usually also includes tangible assets like machinery, technical equipment, land, buildings, op­er­a­tional equipment, and vehicles, which can’t be quickly liq­ui­dat­ed and are con­sid­ered long-term assets. But the cash flow statement only rep­re­sents the inflow and outflow of a company’s cash finances, meaning the changes of liquid cash and cash equiv­a­lents during a period of time and their causes.

Cash flow statement: Option or oblig­a­tion?

A cash flow statement is required by the US Se­cu­ri­ties and Exchange Com­mis­sion (SEC) as one of the disclosed quarterly financial reports for publicly traded companies. The statement of cash flows is also required whenever a business makes an income report, a rule set by the Financial Ac­count­ing Standards Board (FASB) back in 1973. The ASC 230 is the current standard for cash flow statement reg­u­la­tion. This statement differs from an income statement included in an annual report, as it only tracks cash, not contracts that count as revenue or other forms of potential profit. Managing cash flow ac­cu­rate­ly is crucial for analysis of a company, and is in the best interest of investors and analysts.

Cash flow state­ments are the best way to judge a company’s short-term viability, making them par­tic­u­lar­ly crucial for small busi­ness­es or busi­ness­es that rely on investors with con­fi­dence in their ability to pay bills. It’s rec­om­mend­ed for any business to analyze cash flow at least once per quarter. Even companies that appear to be prof­itable can go under if they don’t actually have enough cash on hand to pay the bills.

Pre­sen­ta­tion of in­for­ma­tion in a statement of cash flows

The FASB, as the authority regarding ac­count­ing standards, added the dis­clo­sure of funding sources and uses to the Generally Accepted Ac­count­ing Prin­ci­ples (US GAAP) but the specific reg­u­la­tions regarding the pre­sen­ta­tion of in­for­ma­tion in a cash flow statement come from ASC 230.

State­ments of cash flows are broken down into three different sections:

  • Cash from financing
  • Cash from op­er­a­tions
  • Cash from in­vest­ments

These sections are followed by a general statement of the net increase or decrease in cash.

Prepa­ra­tion of the statement can happen in one of two ways, which vary only in how they present the op­er­a­tional section: the direct method, which is en­cour­aged (though not required) by the FASB, and the indirect method. The direct method, also referred to as the income statement method, starts with cash received and then subtracts spent cash via reports of operating receipts and payments. The indirect method, on the other hand, starts with net income, adds the de­pre­ci­a­tion back in, and then cal­cu­lates changes via a balance sheet. Both methods even­tu­al­ly yield the same results and net income must in both cases be rec­on­ciled to net cash flows from operating ac­tiv­i­ties.

As cash flow is cal­cu­lat­ed, de­pre­ci­a­tion values are left out of the statement. Any expected revenues that have not yet been received are also not included. Below is table detailing the basic structure of a cash flow statement template, as defined by ASC 230:

Sup­ple­men­tary in­for­ma­tion on the cash flow statement

As a condensed version of cash flow, a statement of cash flows is intended to provide a com­pre­hen­sive overview of the financial situation of a company for quarterly or annual financial state­ments. To help fa­cil­i­tate the in­ter­pre­ta­tion of the document, ASC 230 provides for a number of additions and de­c­la­ra­tions to be included in the notes as mandatory dis­clo­sures.

  • In­for­ma­tion on the com­po­si­tion of the finances
  • Cal­cu­lat­ed rec­on­cil­i­a­tion of the cash and cash equiv­a­lents from the cor­re­spond­ing balance sheet
  • Cash and cash equiv­a­lents held by the company but not available for use
  • Separate in­for­ma­tion on cash flows related to the ac­qui­si­tion or sale of sub­sidiaries

Quarterly or annual financial state­ments also need to contain the following in­for­ma­tion, provided it hasn’t already been included:

  • Separate statement of cash flows from received and paid interest and dividends
  • Separate statement of cash flow from income tax

Non-cash ac­tiv­i­ties may also be disclosed in the footnotes, including such ac­tiv­i­ties as:

  • Leasing to purchase an asset
  • Con­vert­ing debt to equity
  • Ex­chang­ing non-cash assets or li­a­bil­i­ties for other non-cash assets or li­a­bil­i­ties
  • Issuing shares
  • Payment of dividend taxes in exchange for assets

A cash flow statement made using the direct method might look like the following example:

Note

Increases in cash are generally listed normally, while decreases are written in (paren­the­ses).

Click here for important legal dis­claimers.

Reviewer

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