THE STATEMENT OF CASH FLOW

CASH FLOW STATEMENT,

the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement capture both current operating result and accompanying changes in  the balance sheet and it is useful to determining the short term viability of a company.

Balance sheet, income statement and the cash flow statement are the three generally accepted financial statement used by most businesses for financial reporting. All the three statement are prepared from the same accounting data. But each statement has its own purpose. The purpose of the cash flow statement is to report the sources and uses of cash during the reporting period

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STRUCTURE OF THE CASH FLOW STATEMENT.  

The cash flow statement are broken down into three section.

·         Cash flow from operating activity.

·         Cash flow from investing activity.

·         Cash flow from operating activity.

CASH FLOW FROM OPERATING ACTIVITY

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Cash flow from operating represent changes in the working capital accounts.The operating component of a cash flow reflect how much cash is generated from company products and the services. Generally changes made in cash, account receivable, depreciation , inventory and account payable are reflected in the operating activity.

Cash flow is calculated by making certain adjustment to net income by adding and subtracting differences in revenue ,expenses and credit transaction that occur from accounting period to next period. The adjustment are made because noncash items are calculated into net income and the total asset and the liabilities, all the transaction not involved actual cash item many item are re-evaluated when calculated cash flow statement it included the following.

·         payment of rent.

·         Cash receipt from sale and performance of services.

·         Payment of tax.

·         Payment to supplier and contractors.

CASH FLOW FROM INVESTING ACTIVITY.

 Cash flow from investing represent the purchase and sale of productive asset. Investing activity are the activity in which owner invested in business. Its include capital expenditure  changes in equipment asset or investment which are related to investing activity.

cash change from investing activity are’ cash out’ item because it is used to buy a new building new equipment. and short term asset such as  marketable securities when a company divests of an asset the transaction is consider ‘cash in’ for calculating cash from investing activity. Investing activities also include investments (other than cash equivalents as indicated below) that are not part of your normal line of business.  These cash flows could include:

• Purchases of property, plant and equipment
• Proceeds from the sale of property, plant and equipment
• Purchases of stock or other securities (other than cash equivalents)
• Proceeds from the sale or redemption of investments

CASH FLOW FROM FINANCING ACTIVITY.

Cash flow from financing represents acquiring and dispensing ownership funds and borrowing financing cash flow in long term debt and equity.

Example include cash flow from additional debt and equity financing are.

·         Debt financing include both short and long term financing.

·         Dividend paid are the financing cash flow because dividends flow  through the retained earning statement

.METHOD OF CASH FLOW STATEMENT

There are two methods for preparing the cash flow statement – the direct method and the indirect method.  Both methods give  the same result, but different procedures are used to arrive at the cash flows.

DIRECT METHOD.

Under the direct method, we are basically analyzing our cash and bank accounts to identify cash flows during the period.  we could use a detailed general ledger report showing all the entries to the cash and bank accounts, or we could use the cash receipts and disbursement journals. we would then determine the offsetting entry for each cash entry in order to determine where each cash movement should be reported on the cash flow statement.

Another way to determine cash flows under the direct method is to prepare a worksheet for each major line item, and eliminate the effects of accrual basis accounting in order to arrive at the net cash effect for that particular line item for the period.  Some examples for the operating activities section include:

Cash receipts from customers:

• Net sales per the income statement
• Plus beginning balance in accounts receivable
• Minus ending balance in accounts receivable
• Equals cash receipts from customers

Cash payments for inventory:

• Ending inventory
• Minus beginning inventory
• Plus beginning balance in accounts payable to vendors
• Minus ending balance in accounts payable to vendors
• Equals cash payments for inventory

Cash paid to employees:

• Salaries and wages per the income statement
• Plus beginning balance in salaries and wages payable
• Minus ending balance in salaries and wages payable
• Equals cash paid to employees

Cash paid for operating expenses:

• Operating expenses per the income statement
• Minus depreciation expenses
• Plus increase or minus decrease in prepaid expenses
• Plus decrease or minus increase in accrued expenses
• Equals cash paid for operating expenses

Taxes paid:

• Tax expense per the income statement
• Plus beginning balance in taxes payable
• Minus ending balance in taxes payable
• Equals taxes paid

Interest paid:

• Interest expense per the income statement
• Plus beginning balance in interest payable
• Minus ending balance in interest payable
• Equals interest paid

Under the direct method, for this example, you would then report the following in the cash flows from operating activities section of the cash flow statement:

• Cash receipts from customers
• Cash payments for inventory
• Cash paid to employees
• Cash paid for operating expenses
• Taxes paid
• Interest paid
• Equals net cash provided by (used in) operating activities

Similar types of calculations can be made of the balance sheet accounts to eliminate the effects of accrual accounting and determine the cash flows to be reported in the investing activities and financing activities sections

INDIRECT METHOD

In preparing the cash flows from operating activities section under the indirect method,we start with net income per the income statement, reverse out entries to income and expense accounts that do not involve a cash movement, and show the change in net working capital.  Entries that affect net income but do not represent cash flows could include income we have earned but not yet received, amortization of prepaid expenses, accrued expenses, and depreciation or amortization.  Under this method we are basically analyzing our income and expense accounts, and working capital.  The following is an example of how the indirect method would be presented on the cash flow statement:

• Net income per the income statement
• Minus entries to income accounts that do not represent cash flows
• Plus entries to expense accounts that do not represent cash flows
• Equals cash flows before movements in working capital
• Plus or minus the change in working capital, as follows:
• An increase in current assets (excluding cash and cash equivalents) would be shown as a negative figure because cash was spent or converted into other current assets, thereby reducing the cash balance.
• A decrease in current assets would be shown as a positive figure, because other current assets were converted into cash.
• An increase in current liabilities (excluding short-term debt which would be reported in the financing activities section) would be shown as a positive figure since more liabilities mean that less cash was spent.
• A decrease in current liabilities would be shown as a negative figure, because cash was spent in order to reduce liabilities.

The net effect of the above would then be reported as cash provided by (used in) operating activities.

The cash flows from investing activities and financing activities would be presented the same way as under the direct method.

CONCLUSION

A company can use a cash flow statement to predict future cash flow, which helps with matters in budgeting. For investors, the cash flow reflects a company's financial health: basically, the more cash available for business operations, the better. However, this is not a hard and fast rule. Sometimes a negative cash flow results from a company's growth strategy in the form of expanding its operations.

By adjusting earnings, revenues, assets and liabilities, the investor can get a very clear picture of what some people consider the most important aspect of a company: how much cash it generates and, particularly, how much of that cash stems from core operations.

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