Cash Flow Statement
A cash flow statement is a financial statement that summarizes the cash inflows and outflows of a company over a particular period. It is used to provide information about a company’s liquidity and cash-generating ability.
Components of a Cash Flow Statement:
- Cash generated from operating activities: This includes cash received from customers, cash paid to suppliers, and cash paid for interest and taxes.
- Cash generated from investing activities: This includes cash received from the sale of assets and cash paid for the purchase of assets.
- Cash generated from financing activities: This includes cash received from the issuance of debt and cash paid for the repayment of debt.
The Cash Flow Statement follows the indirect method:– The indirect method calculates cash generated from operating activities by subtracting depreciation and amortization from the change in current assets and current liabilities.- The indirect method is preferred by many companies because it is more concise and easier to prepare than the direct method.
The Cash Flow Statement is used for:
- Evaluating a company’s liquidity: The cash flow statement can be used to determine whether a company is able to meet its debt obligations and cover its operating expenses.
- Evaluating a company’s cash-generating ability: The cash flow statement can be used to determine how much cash a company is generating from its operations and investment activities.
- Comparing companies: The cash flow statement can be used to compare companies with similar industry profiles and financial performance.
Here is an example of a cash flow statement:
Cash Flow Statement for ABC Company for the Year Ended December 31, 2022
Cash generated from operating activities:Cash received from customers $50,000Cash paid to suppliers $20,000Cash paid for interest $5,000Cash paid for taxes $2,000
Cash generated from investing activities:Cash received from sale of assets $10,000Cash paid for purchase of assets $25,000
Cash generated from financing activities:Cash received from issuance of debt $15,000Cash paid for repayment of debt $5,000
Net change in cash $40,000
