What is cash flow statement?
Cash flow statement is a kind of profit and loss statement which is helpful to the company to record and analyze the aggregate data of the cash inflows and cash outflows of the company pertaining to the required period of time.
It will be useful to record the cash inflows such as operating incomes and amount realized from the investments made by the company or any amount collected by way of issuing the financial instrument. The outflows which are recorded are such as operating expenses of the company in day to day life as well as the investments made by the company in the given period and also repayment of any amount collected on account of a financial instrument. FinanceShed brings you a detailed analysis of Cash Flow Statement.
Need of cash flow statement in companies
There are many needs in the enterprise to record the cash inflows and outflows of the company, such as the organization records their accounts on the accrual basis so when there will be any need of the actual amount of cash needed there will be mismatch in the physical form as according to the accrual basis the sales will be recorded but there will not be any kind of inflow of the cash also there will be some purchases but no outflow will occur, so the statement is prepared at the end of a certain period so that the amount of money lying with an enterprise can be tallied at the end of the predetermined period.
Preparation of cash flow statement
The preparation of a cash flow statement is done at the end of the period by the company with the help of three types of cash flow which are
- Cash flow from operating activities
- Cash flow from investing activities
- Cash flow from financing activities
The cash flow statement is divided into 3 above-mentioned segments and following is the detailed analysis of the transactions included in the above activities
- Cash flow related to the operations: The operating activities of the company include the activities and transactions done by the company in day to day basis. There will be cash inflows in an account of sales or rent received etc. and the outflows will be such as purchase and payment of salary.
- Cash flow from investing activities: the investments made by the companies and its transaction will be recorded in the investing activities, so the inflows such as amount received by selling investment will be recorded and the payment for an investment made etc. will be recorded in the outflows through investment activity.
- Cash flow from the financial activity: The financial activities will include the transactions of an issue of the shares or buy back or redemption of debenture etc. which will affect the liability side of the balance sheet.
So while preparing the cash flow statement at first there will be net profit before tax recorded and the adjustment of non-cash operating items will be made so that to arrive at the cash items. After that, if there are any unusual event effect needed then it will be provided to arrive at the cash flow from operating activity. After the total of all the segments are calculated the total cash flow for the company will be a summation of these activity’s total amount.