Cash flow statement and how to use it

A cash flow statement is an internal document that reflects the company’s ability to earn (generate) money and its equivalent and allows it to assess the organization’s ability to manage financial cash flows.

What is the cash flow statement?

A cash flow statement is an element of an accounting report that is compiled in tabular form and contains information about cash flow from the position of receipt and payment of funds. As a rule, this is one of the four main accounting reports.

Components of the cash flow statement

The cash flow statement itself consists of several subsections:

  • Operating activity. Here we reveal the essence of cash flows and the main sources of cash flows for the enterprise;
  • Investment activity – a group of expenses spent on the organization’s resources needed to generate future profits, but can also include money coming in;
  • Financial activity – a group of financial flows related to the creation of the company’s capital.

Special attention is paid to the company’s investment work. In this section, you can estimate the actual cost of purchasing resources needed to generate future flows and income for the entrepreneur.

Composition – payments and receipts of funds related to debt (equity) instruments, loans and advance payments to other companies, expenses related to the purchase of fixed assets, financial receipts (payments) for forwarding contracts, futures, contracts, options, and so on.

Operating activities

The section “operating activities” in the statement of cash flow examines whether the company has enough funds to solve operational tasks, pay dividends, repay loans, and so on. Data on certain elements of capital flows in the field of operating activities, combined with other information, allows you to predict future cash flows from operating activities.

This type of cash flow in any cash flow statement example is directly related to the main work of the company. The flows themselves are the result of transactions included in the definition of loss or profitability. The main examples of capital flow from the operating scope include receipts from making payments to a supplier for services (goods) and from providing services (goods), payments to suppliers and employees, receipts and payments from insurance companies, refunds or income tax payments, financial receipts under contracts concluded, and so on.

A number of operations, for example, the sale of equipment, can cause a loss or additional income. In this case, cash flows are classified as flows received from investments in various types of assets. On the other hand, cash payments made for the production of tangible assets or the leasing of assets will be classified as fixed assets received from operating activities.

An organization may have securities or loans that are used for trading or commercial purposes. In this situation, they are equated to stocks purchased for resale. 

An operating report is often prepared using one of two options:

  • Through a direct method that examines the main types of gross payments and receipts. As a result, the report on losses and profits is formed on the basis of the cash method;
  • By the indirect method, when the company’s expenses (loss) or income are adjusted based on the results of non-financial transactions, as well as adjustments (changes) to the company’s liabilities and assets.