Cash Flow Statement — Microsoft Excel
In this article, we will walk you through the core concept of cash flow statement that what is cash flow statement, why we use cash flow statement and how cashflow statement will help us to identify the patterns of dropping cash into business assets, expenses, salaries and so on.
Let’s Dive In
Cash Flow Statement
The cash flow statement shows the inflows and outflows of a company during a financial period, which can be monthly, quarterly, biannually, annually, or even
weekly or fortnightly, depending on management and business requirements. It fills the gap between the balance sheet and income statement, where the funds move in or out. The information we get from the cash flow statement is beneficial
for the management to make informed decisions for regulating business operations. Therefore, it is also known as the statement of cash flow.
A cash flow statement can be prepared using two methods:
- Direct Method
- Indirect Method
The direct method is not in practice now, so we will focus only on the indirect
method.
There are three sections of the statement of cash flow in the indirect method:
- Operating Activities
- Financing Activities
- Investment Activities
Operating Activities
The first section of the cash flow statement covers cash flows from operating activities (CFO) and includes transactions from all operational business activities.
Operational business activities include inventory transactions, interest and tax payments, employee wages and rent payments. Any other form of cash flow, such as investments, debts, and dividends, is not included in this section. A cash flow
statement should show positive cash flow for its operational activities. If it doesn’t, the business may find it difficult to manage its daily business operations. The items in the cash flow statement are not all actual cash flows, but reasons why cash flow is different from profit.
Investment Activities
The second section of a cash flow statement records the gains and losses caused by investment in assets (capital expenditure) or dividends received from investment in stocks and interest received on loan payments.
A company may sometimes experience negative cash flow due to heavy investment expenditure, but this is not always an indicator of poor performance because it may lead to high capital growth.
Financial Activities
The third section of a cash flow statement shows the cash flow between the company and its owners and creditors. Financial activities include transactions of debt, equity and dividends. In these transactions, incoming cash is recorded when capital or debt
increases such as from investors or banks and outgoing cash records are made when dividends are paid and borrowings and bank loans are repaid.
The above figure shows the format of financing activities of a cash flow statement.
Conclusion
We will understand in this walk in guide about cash flow statement and we will understanding the fundamental concept and importance of cashflow statement in the perspective of accounting and finance, we adopting the theoretical approach in that to understand how we identify our flow and spending of our cash and it also provides different up/down trends of sales and investment of cash and after that we can easily making a decision that how we take another way or strategy for better performance for our business.
