Understanding Cash Flow Statement
Financial statements which are prepared by buisness decision maker with the help of accounting report made by an accountant in fixed accounting period is known as cash flow statement of buisness.
In cash flow statement accountants (you or economic knowing person) used to make short notes of financial statements on ledger or financial book of total cash incoming in business from outside world and total money going outside from buisness to the outside world.
Incoming of money to buisness organization can be in the form of profit, funds and income etc. Outgoing of money in cash flow can be in the form of total expenditure on various things, payment, and rent etc.
Do you know? Cash flow statement in other way in short way spoken in economics world as income statement.
If you have little knowledge of economics subject, then you can clearly make conclusion about any business company present financial situation after watching and reading cash flow statement prepared in fixed accounting period of that particular company.
Company said to be functioning efficient when company running every types of transactions in managed way during accounting period. Current situation of company behaving in marketing can be monitored with the help of cash flow statement of that particular company or buisness.
We can find details of how company is making payment to it operating expenses and how company generated income to company debt.
Balance sheet, and income statement both are prepared by with help of accounting report. You can also say that fincial statement compliment both of these financial records.
What Purpose Of Cash Flow Statements
There are many important purpose of cash flow statement using in accounting process. List of most important purpose of cash flow statement are given below:-
1. Cash flow statement prepared for the purpose to tell buisness decision makers or you to make conclusion about how company generated income during accounting period.
2. Balance sheet and income statement are prepared through accounting process in fixed accounting period. Both income statement and fincial statement compliment cash flow statement.
3. Cash flow statement involved various types of components activities such as cash generated from investment activities, operating activities and cash generated from finance activities.
How to use cash flow statement
Cash flow statement most widely used method of doing accounting process. If you want to want know about any particular buisness transaction incurred in accounting period then you can find out from cash flow statement brief description.
There are some techniques, method and proper ways of using cash flow statement in any business.
Smart investor always read cash flow statement of companies before investing money. Cash flow statement of any company gives clear image of company performance.
Investors can use cash flow statement as tools of distinguishing between two or more companies. Investors can take decision which company is stable financial at present and after that investors can invest their money in financial stable company to earn profit in future.
In the case of you are creditor (buisness decision makers) in this case you can make full use of cash flow statement.
Buisness organization can use cash flow statement to find out how much cash available inside company for functioning of at present market situation.
What 3 types of cash flow statement
Every thing in economics study are prepared in well managed and follow suitable structure. In preparation of cash flow statement also consist of various financial components.
1. Cash flow generated from financial activities
2. Cash flow generated from operation activities.
3. Cash flow generated from investing activities.
4. This component is kept optional. In some case those activities mentioned which not generating cash or cash flow.
Basic difference between Cash flow statement, balance sheet and income statement
Cash flow statement do not mention about future income and also not those cash which are given outside from company as credit to other. Cash flow statement different from net income.
But you can clearly find these things which are missing from Cash flow statement in income statement and balance sheet.
Balance sheet and income statement both include space in which future sales and sale generated from credit can clearly mentioned.
Cash flow form operating activities
From the name it is clear cash flow generated from product selling and services provided activities of the company. Operating activities of buisness in cash flow statement involved all sources of cash and uses of the cash from the company.
Cash flow statement operation activities consists of these components given below-
Cash flow generated from rent of properties. Suppose company related to construction given his house on rent to his customers. Customers give rent to a company shoes property they are using.
Cash flow generated from sales of company goods as income and payments to other services comes under operating activities cash flow types.
All types operative activities which company perform during accounting period and results cash flow generated inside company or outside cash flow. Operating activities of buisness includes activities like rents, income tax payment, wages payment.
Investing activities cash flow statement
In this type cash flow activities investors invest their money in company in hopes of earning high return. Whereas company also make according to his vision.
Basically two types of investment activities done i.e. short term investment, long term investment and loans principal amount made for other entities. This type of cash flow activities includes non current assets.
Due to investment activities by both investors and company generated cash flow. These types of cash flow created due to investment activities comes under this component of cash flow statement investing activities.
Financial activities cash flow statement
In this type of cash flow activities included all non current liabilities and owner's equity. Owner's equity included long term principal amount, stocks sale and repurchase and dividend payments.
How calculated cash flow statement
You can calculate cash flow statements very easily. To calculate cash flow statement you have to make some changes in net income by subtracting or adding expenses, revenues and credit transaction.
Credit transaction means transaction which happened during one to another period of time and this is clear mentioned on balance sheet.
You have to do these adjustments in net income because it eliminates those non cash item which are not generating any income or no cash flow.
If you don't make these adjustments in net income then these non cash generating item get calculated in cash statement and this results in lose to net income of company or buisness.
Do you know? What are the methods of calculation of cash flow statement. You can use two methods of calculating cash flow statement.
Direct cash flow statement method
Inside direct cash flow method you can add all types of transactions incurred in accounting period in form of cash payments and receipts.
Here in direct cash flow statement method receipt included cash paid to supplier,cash paid as salaries and cash receipts from customers.
Indirect cash flow statement method
In this method of cash flow statement you can calculate cash flow from operation activities. You can first take off net income from company income. Net income taken off in this method of cash flow because company income statement prepared on accurate basis.
Company revenue only recognised when it is earned and not recognised when received. Indirect methods used for calculating cash flow generated from operation activities.
In case of cash flow generated from operative activities net cash income not clear give representation of net cash income. You need addo adjustments before filling income tax and return.
Let's understand with examples suppose you running harvesting implement company. Now you are using same tractor year after then there will decline cash value of tractor year after year due to wear and tear in it.
This decline in value known depreciation cost. Now here depreciation is not a cash expense. That is why it is added as net earnings in indirect methods of cash flow statement.