What is the Statement of Cash Flows?
The Statement of Cash Flows, also known as Cash Flow Statement, is one of the primary financial statements. It summarizes the amount of the cash and cash equivalents entering and exiting a company or business. The Statement of Cash Flows consists of all the cash inflows and outflows of a company for a specific period.
The Statement of Cash Flows helps companies and stakeholders measure how the company manages its cash position. Several factors determine the short- and long-term success of a business. Among those, two crucial ones are profits and cash flows. Companies show their profits through the Income Statement, which does not represent actual cash flows. Therefore, they use the Statement of Cash Flows to present their cash performance.
What are the various Statement of Cash Flows sections?
There are three categories under which companies must qualify their cash flows for a period. These are cash flows from operating, investing, and financing activities. Each of these represents cash flows from different parts of a company. Given below is a brief description of each of them.
Cash Flows from Operating Activities
Cash flows from operating activities present all the cash inflows and outflows for a period that a company generates from its operations. In other words, it shows how much cash a company makes from its products or services directly. Therefore, the cash flows from the operating activities section may consist of the following cash flows.
- Receipts from sales of goods and services to customers.
- Payments against the purchase of raw materials to suppliers.
- Salaries and wages paid to employees.
- Rent payments.
- Interest payments.
- Tax payments.
- Other operating expenses against which the company has made payments.
Cash Flows from Investing Activities
Cash flows from investing activities include any cash inflows and outflows from a company’s investments. Investments, in this context, does not only mean investing in securities or stocks. It may also include the purchase or sale of an asset, loans paid to third-parties, and payments related to mergers or acquisitions.
Therefore, any cash flows from changes in assets, equipment, and investments will classify as investing activity. Usually, investing activities give rise to cash outflows. It is because most of these investments require companies to pay cash rather than receive it.
Cash Flows from Financing Activities
Cash flows from financing activities include cash received from raising finance. These may consist of capital raised from owners or shareholders and debt received from lenders. This section may also include cash flows related to payments to investors, shareholders, or lenders. In this case, companies usually report dividend payments, payments against stock repurchases, and repayment of debt.
Therefore, any payments made to financers, whether debt or equity will be cash outflows from financing activities. Similarly, cash received from these parties will result in cash inflows.
Statement of Cash Flows Example
Here’s an example of a Statement of Cash Flows for a company Blue Co.
| Blue Co. | |
| Statement of Cash Flows | |
| For the year ended December 31, 202x | |
| Cash Flows from Operating Activities | |
| Net earnings | $ 1,500,000 |
| Additions | |
| Depreciation | $ 50,000 |
| Decrease in Accounts Receivable | $ 60,000 |
| Decrease in Inventory | $ 45,000 |
| Subtractions | |
| Decrease in Accounts Payable | $ (20,000) |
| Interest paid | $ (10,000) |
| Taxes paid | $ (25,000) |
| Net Cash Flows from Operating Activities | $ 1,600,000 |
| Cash Flows from Investing Activities | |
| Purchase of asset | $ (1,000,000) |
| Sale proceeds from asset disposal | $ 50,000 |
| Net Cash Flows from Investing Activities | $ (950,000) |
| Cash Flows from Financing Activities | |
| Dividend payments | $ (50,000) |
| Loan repayment | $ (200,000) |
| Net Cash Flows from Financing Activities | $ (250,000) |
| Net Cash Flows for the year | $ 400,000 |
Conclusion
The Statement of Cash Flow is one of the primary financial statements for companies. It shows the cash flows a company generates from or makes against its activities. Companies must classify their cash flows as either cash flows from operating, investing, or financing activities.
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