Preparing Cash Flow Statement | Explanations with Examples

By | December 10, 2017

Cash Flow Statement preparation Example with Explanation for its users

♦ What is cash flow statement?

A cash flow statement is a statement which shows cash inflow and cash outflow data of the company. The report basically makes quarterly and four times in a year. Generally, publicly traded company expose their cash flow report publicly and also regulatory authority like as Security and Exchange Commission (SEC) in all over the world. In that case, cash inflow or cash receipts is company’s ongoing operation and externally cash outflow is related to Financial and investing activities. It effects on the Financial statement as well and it is most important for its users such as SEC and shareholders in the stock market. They always huger to know about an audited report of financial position in a more specifically cash flow statement.

♦ Types of cash flow statement:

In an accounting system, there have two forms of accounts cash basis and accrual basis. Most of the public Ltd. the company uses accrual accounting which is recorded transaction as same of an income statement and cash position but in cash basis accounts there has differed to the recorded transaction system.

On the other hand, cash flow statement preparing two of methods one is cash flow statement direct method another is the indirect method. In these two methods have three activities.

  1. Operating activities
  2. Investing activities
  3. Financial activities

We may discuss these methods and three activities which are given below;

◊ The Cash flow statement Direct method:

Cash flow statement direct method of the statement represents specification of the items that affect a cash flow which is given below;

  • Cash received from customer
  • Dividend and interest received
  • Cash paid to supplier
  • Interest paid and
  • Income tax paid

The direct method is rarely used in many types of the company because of calculation and specification of income and expenses in so difficult for any organization.

◊ Cash flow statement Indirect method:

Cash flow statement indirect method is mostly used in any public traded company and it is so easily calculated and easy to use which is so easy to calculate net profit from the given information such as cash provided from or used by operating activities, cash provided or used by financial activities and cash provided from or used investing activities.

♦ The format of cash flow activities:

Cash flow statement format has four sections or sub-point in his activities;

  1. Cash flow statement Operating activities
  2. Cash flow statement Investing activities
  3. Cash flow statement Financial activities and
  4. Supplementary information:

In the cash flow statement, we can record it direct or indirect method. If we can calculate indirect method which so popular method is in the publicly traded company its shows the balance sheet at the end of the year much-needed information is intrigued.  We can discuss these four activities with items is as given below;

  1. Operating activities:

Cash flow statement Operating activities sets of operating business activities in cash flow statement started with net income and then reconcile with all cash and noncash items in business activities. For example accounts payable is a noncash item. If accounts payable go up it means the purchase is going up but no cash transaction is made up purchase time. In cash flow statements accounts payable includes in net profit because the cash transaction is not transaction yet. On another hand, Accounts receivable deduct from net profit because of cash not receive yet. May also includes items are amortization, description, prepaid, revenue and so on. Operating activates excludes and includes with net income and gives results cash provided from and used by operating activities is discuss below;

◊ Cash provided from and Used by operating activities:

The points work on a net income in a cash flow statement and convert its accrual basis based on current assets, liabilities are given below;

  • Accounts Receivable
  • Inventory
  • Supplies
  • Others current assets
  • Notes Payable
  • Payroll Payable
  • Accounts Payable
  • Interest Payable
  • Income Taxes Payable
  • Unearned Revenues

    2. Investing activities:

Cash flow statement investing activities is based on spent money on property, plant, and machinery. It seems long-term money flows and capital expenditure finds changes. The investing actives grow fast when investor chose the company to invest. In this section cash flow provided us cash provided from or used by investing activities based on long-term investment.

◊ Cash Provided From or Used By Investing Activities:

 The sub-point is showing us excludes and includes with net income which is based on long-term investment in businesses is given below;

  • Long-term Investments
  • Buildings
  • Vehicles
  • Land
  • Equipment
  • Furniture & Fixtures

In the investing activities, long-term investment is based on purchase land or property.

  1. Financing activates:

Cash flow statement financial activities are shows the transaction of the details of business activities which reflect business activities in cash flow statements. Stockholders and analysts always looking for financing section to find the amount paid like dividend, issue share, debt and equity and so on. In this point cash provided from or Used by Financing Activities as per business financial activities especially transactions is repayment and borrowing Company short-term and long-term activities.

◊ Cash Provided From or Used By Financing Activities:

 In financial activities business activities includes and excludes net income with long-term activities in balance of business and the results are cash provided from or Used by Financing activates is given below;

  • Bonds Payable
  • Deferred Income Taxes
  • Preferred Stock
  • Paid-in Capital in Excess
  • Common Stock
  • Retained Earnings
  • Treasury Stock

In short, we can say that financial activities are displayed companies short and long-term lends and borrowing.

  1. Supplementary activities:

The supplementary activity shows the amount of interest, income tax paid, exchange of company stocks and company bonds is reported in this section.

What is a Cash Flow Statement

♦ Example cash flow statement:

 There have two methods of cash flow statements (1) Direct Method (2) Indirect Method. We can discuss the two methods with example one by one.

First, we can discuss statement of ash flow indirect method;

In the following example, we will assume that net income is $2,10,500, depreciation is $40,000, and the firm pays out dividends in the amount of $75,000.

ABC Company Statement of Cash Flows

ABCCompany Statement of Cash Flows
1.Net Income$ 2,10,500
3.Increase in Accounts Receivable(30,000)
4.Increase in Inventory(20,000)
5.Decrease in Prepaid Exp10,000
6.Increase in Accts Payable35,000
7.Decrease in Accruals(5,000)
8.Net Cash Flows from operating activities$240,500
9.Increase in Investments                                           (30,000)
10.Increase in Plant & Equipment(100,000)
11.Net Cash Flows from investing activities110,500
12.Increase in LT Bank Loans50,000
13.Dividends Paid(75,000)
14.Net Cash Flows from financing activities(15,000)
15.Net increase in cash flows$70,500
  • Direct Method Example:

XYZ recorded the following cash flows statement tamplet direct method which is given below:


Statement of Cash Flows
for the year ended 31st Dec,2017

Cash flows from operating activities
Cash receipts from customers$35,800,000
Cash paid to suppliers(11,800,000)
Cash paid to employees(21,200,000)
Cash generated from operations2,800,000
Interest paid(2,10,000)
Income taxes paid(1,500,00)(3,60,000)
Net cash from operating activities$2,440,000
Cash flows from investing activities
Purchase of property, plant, and equipment(6,80,000)
Proceeds from sale of equipment2,10,000
Net cash used in investing activities(470,000)
Cash flows from financing activities
Proceeds from issuance of common stock2,000,000
Proceeds from issuance of long-term debt100,000
Principal payments under capital lease obligation(20,000)
Dividends paid(350,000)
Net cash used in financing activities1,730,000
Net increase in cash and cash equivalents3,700,000
Cash and cash equivalents at beginning of period1,740,000
Cash and cash equivalents at end of period(5,000,000)


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