cash flow statement is a financial report which showcases the sources of a company's cash flow and how cash is spent over a period of time. The report does not include non-cash items such as depreciation. The report makes it easy for the company to figure out short-term viability. It is vital for businesses to compute the expenses easily.
The cash flow statement is similar to the income statement where it records a company’s performance over a period of time. It shows the actual money that the company has generated. Also, it gives an idea of how the company has performed in managing inflows and outflows of cash.
Cash From Operations- The cash is generated from day-to-day business operations
Cash From Investing- Cash is used for investing in assets, it also proceeds from the sale of other businesses, equipment and other long-term assets.
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Cash From Financing- It relates to the cash paid or received from issuing and borrowing of funds. This section includes the dividends paid and it is sometimes listed under the operations.
Net Increase or Decrease in Cash- The increase in cash as compared to the previous year will be written normally, but the decrease in cash will be written in brackets
There are two methods to make the cash flow statement, the direct and the indirect method, both methods are as follows:
The direct method is called the income statement method where it gives the report about the major classes of operating cash receipts and payments. Using the direct method for cash statement, it begins with money received and then subtracts with money spent to compute the net cash flow. Depreciation is excluded from it because it is an expense that affects the net profit, it is not the money spent or received.
The indirect method is called the settlement method that focuses on net income and the net cash flow from operations. By using this method you can start with net income, add back depreciation and then calculate the changes in Balance Sheet items. This method adds depreciation into the equation because it started with the net profit in which depreciation was subtracted as an expense.
You can use any of these methods, but you will end up having total cash provided by the operating activities. This is one of the most important lines on the cash flow statement. A company has to generate cash to operations to sustain business activity. In case, if a company has continually borrowed or obtained additional investors, then the company’s long-term existence is in danger.