- Glossary
- Cash Flow Statement
Cash Flow Statement
A company's movement of cash and cash equivalents (CCE) that are received and disbursed is summarized in the cash flow statement (CFS), a financial statement. The CFS gauges how well a company manages its cash position, or how well it generates cash to cover its debt payments and fund its operating costs.
The cash flow statement is commonly segmented into three sections:
- Operating activities: Include both revenue and expenses in the cash flow that is generated once the company has provided its normal goods or services.
- **Investing activities: **Include the cash flow from asset purchases and sales. Consider purchasing non-physical assets like patents using free cash rather than debt, as well as physical assets like real estate or vehicles.
- Financing activities: Total cash flow from both debt and equity funding.
Importance Of Cash Flow
One of the most important financial records that a company creates is a cash flow statement, which provides important information about the state of the company. Regardless of your position, you can develop the financial accounting abilities necessary to make better business and investment decisions by learning how to interpret a cash flow statement and other financial documents.
How Cash Flow Is Calculated
The operating activities part of cash flow statements is calculated and prepared using two popular methods, which are examined here.
1. Cash Flow Statement Direct Method
The direct method, which is the first technique employed to determine the operating section, is founded on the transactional data that had an impact on cash during the period. Take all cash receipts from operating activities and deduct all cash disbursements from operating activities to determine the operation section using the direct method.
2. Cash Flow Statement Indirect Method
The second strategy for developing the operations section of the cash flow statement is the indirect method. This approach is based on accrual accounting, in which revenues and expenses are recorded at points other than when cash is paid or received; as a result, the cash flow from operating activities and net income change as a result of these accrual entries and adjustments.
Key Takeaways
- A cash flow statement lists all of the cash and cash equivalents that come into and go out of a business.
- A company's cash management, especially how successfully it earns cash, is highlighted by the CFS.
- The inclusion of this financial statement enhances the accuracy of both the balance sheet and income statement.
- The majority of the CFS comes from three sources: operating, investing, and financing activities.
- The direct approach and the indirect method are the two ways to compute cash flow.
