Format Of A Cash Flow Statement (With Methods And Examples)

Many businesses rely on cash flow statements when monitoring their financial health. This financial statement provides a detailed overview of a business' cash transactions and reports how a company handles its accounting. Understanding the format of a cash flow statement can help you create this financial statement and ensure it accurately reports the net cash of a company. In this article, we discuss what a statement of cash flow is, understand its structure, discover the methods of preparing it and explore examples of this statement.

What is a cash flow statement?

A cash flow statement is a financial statement that tracks the cash that flows in and out of business during an accounting period. It portrays how a business can spend its cash. Having adequate cash in hand is the bare minimum requirement for a business to stay solvent and avoid bankruptcy. The cash flow statement provides business owners and stakeholders with information relating to the company's current and future debit and credits. This statement allows these professionals to make an informed strategic decision.

Along with a balance sheet and income statement, a cash flow statement helps a business analyse its financial health. For example, if the statement shows that cash flow is negative, a business can make necessary adjustments to increase its revenue and pay its expenses. Ideally, a company's cash from operating income exceeds the net income because a positive cash flow shows that it can remain solvent and grow its operations.

Related: What Are The Functions Of Accounting? (Definition And Types)

Format of a cash flow statement

This financial statement lists all the completed cash transactions and estimates the expenses and revenue. Using the structure or format of a cash flow statement, you can list transactions about the following areas:

Operating activities

The cash flow statement records the expense and income from the daily business activities. Expenses from operating activities relate to the core business operation like employee payroll, production cost, customer payment, taxes and other cash payments. Income from business activities includes cash receipts, product sales and dividends. Usually, successful companies generate revenue from their daily operations and use income from their investments to offset expenses from operations.

This section of the cash flow statement records the company's net earnings that you can get from the net income field of the income statement. After this, list all noncash items involving operating activities. You can then convert them into cash. When companies cannot generate sufficient cash flow for operational growth, they secure financing from external sources. Also, a company with a positive cash flow can easily manage the daily business operations.

Investment activities

The second part of the investment activities records the profit and losses a company faces because of investment in assets like plant, property and equipment. These investment activities reflect the overall change in a company's cash position. When an analyst wants to understand the company's investment in property, they check the changes in the cash flow statement. Also, analysts use the investment section of a cash flow statement to find changes in the capital expenditure or CAPEX. An increasing CAPEX means a reduction in cash flow.

Usually, companies with a high CAPEX are growing. A high CAPEX can show that a company is investing in its future operations. Though having a positive cash flow from investment is a good sign, investors prefer investing in companies that generate cash from business operations rather than investment activities. Often, companies generate cash flow from investment activities by selling property or equipment.

Financing activities

The last section of the cash flow statement records the cash flow between the company and its creditors and owners. This section provides details about the shareholder's dividend, cash from investors and company stock sales. Also, financial activities can include equity and debt. You record the incoming cash when a company raises capital and the outgoing cash when a company pays its dividends. Analysts use the cash flow from the financing section to determine how much money the company paid out as share buybacks or dividends.

For instance, when a business trades its stocks, it generates income from investors and pays shareholder stock dividends. Usually, a negative cash flow from this section shows that a company spends most of their funds paying back loans and dividends than generating income from stock trading.

Related: Everything You Need To Know About How To Become A Stockbroker

Methods for preparing cash flow statements

You can use these methods to prepare a cash flow statement:

Indirect method

The indirect method uses net income as a base and adds and subtracts balance sheet items and noncash transactions to determine the cash flow. Noncash items show up as the company's assets and liabilities on the balance sheet. To calculate the cash flow, you also add or deduct nonoperating expenses such as inventory, depreciation, accounts receivable, accounts payable and accrued expenses. The indirect method allows you to list negative numbers in parentheses and positive numbers as usual. Usually, businesses and organisations do not use the indirect method because it accounts for adjustments and requires more preparation time.

Direct method

The direct method lists every transaction on the company's cash flow statement. Due to this reason, a direct method takes less preparation time because it accounts for all the money a company receives and spends. You list the cash receipt at the beginning of the operating activities. The cash receipt accounts for money a business receives from dividends, customers and interest. This section ignores non-cash transactions, like depreciation and amortisation. The following section lists the company's money, including payments to suppliers and income tax. You can list the outgoing transaction in parentheses.

Using several ways, you can know the items of a cash flow statement, but consider referring to the income statement. This financial statement provides an overview of employees' wages, total sales revenue, cost of goods sold (COGS) and interest expenses. Cash flow statements prepared using the direct method are accurate because they do not require adjustments.

What to include in a cash flow statement?

A cash flow statement tracks cash flow in operating, financial and investment activities. When you add all three areas, it is the net cash flow. It represents the total amount of money that a company has. A positive net cash flow shows that a business generates more cash than it is spending. Usually, investors analyse the cash flow from all three areas to understand the value of a company and its stock. As this financial statement considers only cash or anything equivalent to cash, like checks and bank accounts, it does not consider uncompleted transactions.

For instance, when creating a cash flow statement, you deduct accounts receivable from the net income because the company is yet to receive that amount. Some items of the cash flow statement are:

• net income

• depreciation and amortisation

• deferred income tax expenses

• vendor nontrade receivables

• accounts payable

• current and noncurrent assets

• proceeds from sales of marketable securities

• proceeds from maturities of marketable securities

• notes payable

• sale of land

The items that come in this statement depend on the method of preparation. For instance, when using a direct method, you are likely to exclude noncash items such as depreciation, but you include the noncash items in an indirect method.

Related: Gross Income: What It Is And How To Calculate It Per Month

Examples of cash flow statements using the direct method

Here is an example of a cash flow statement prepared using the direct method:

Sumant's Shoe Shop
Cash flow statement
For the year ended March 31, 2021

Cash flow from operating activities
Cash received from customers
Cash paid for interest
Cash paid for the merchandise
Cash paid for taxes

Net cash provided by operating activities

Cash flow from investment activities
Purchase of equipment, machinery and property

Net cash used in investment activities

Cash flow from financing activities
Proceeds from long-term debts
Payments on line of credit
Payments on long-term debts

Net cash provided or used in financing activities

Net increase or decrease in cash

Ending cash balance

₹ 5,00,000
₹ (40,000)
₹ (80,000)
₹ (30,000)

₹3,50,000

₹(4,00,000)

₹(4,00,000)

₹1,00,000
₹2,25,000
₹(55,500)

₹2,69,500

₹2,19,500

₹2,19,500

Examples of cash flow statements using the indirect method

Here is an example of a cash flow statement prepared using the indirect method:

Sumant's Shoe Shop
Cash flow statement
For the year ended March 31, 2021

Cash flow from operating activities
Net income
Depreciation on fixed assets
Account receivable
Inventory
Prepaid expenses
Accounts payable
Accrue expenses

Net cash provided by operating activities

Cash flow from investment activities
Purchase of equipment, machinery and property

Net cash used in investment activities

Cash flow from financing activities
Proceeds from long-term debts
Payments on line of credit
Payments on long-term debts

Net cash used in financing activities

Net increase or decrease in cash

Ending cash balance

₹ 4,50,000
₹ 30,000
₹ (10,000)
₹ (40,000)
₹ (30,000)
₹ 32,500
₹ 2,750

₹ 4,35,250

₹ (4,00,000)

₹ (4,00,000)

₹ 1,00,000
₹ 2,25,000
₹ (55,500)

₹ 2,69,500

₹ 3,04,750

₹ 3,04,750

In an indirect method, the company lists the net income and makes adjustments for asset accounts, liability accounts, expenses, losses and gains.