Cash flow statement
1. Cash flow statement
Welcome back! In this video we will learn about the cash flow statement.2. Show me the money!
Suppose a customer purchases goods from a company and promises to pay later. This transaction would be recorded in the income statement at the moment the customer purchases the goods, not at the moment the customer pays money for the goods. This is called the accrual method of accounting. The cash flow statement - which shows a business' cash and cash equivalents over a financial period, on the other hand, records transactions when cash is exchanged. Note that entries in the cash flow statement are related to the entries in the income statement and the balance sheet. For instance, when the customer purchases goods and promises to pay later, it first shows up in the income statement and when the customer pays cash, it shows up not only in the cash flow statement but also in the asset side of the balance sheet. However, it is still a distinct financial statement.3. Types of cash flow statement
There are two ways of preparing cash flow statements. The most common method is the indirect method since it is based on the accrual of method accounting, which is the accounting method most businesses follow. In the indirect method, we start with the income and add and subtract transactions that are equivalent to a cash inflow and outflow, respectively. In the direct method, we record actual transactions which take place in cash. We add and subtract the cash inflows and outflows to get the net change in cash balance. We will cover the indirect method in this course since it is used more often.4. Structure of cash flow statement
The cash flow statement can be divided into three parts - cash from operating, investing, and financing activities.5. Cash from operating activities
Cash from operating activities refers to the cash the business earns from the core of its business activities. Accounts receivable, an asset of the business, refers to the amount of goods that were sold on credit, that is, goods sold that the customer promised to pay back in the future. Suppose the business sold $100 of goods, and only $20 was paid in cash. The remaining $80 which was recorded in the income statement is essentially a cash outflow since it is not received in cash. Analogously, accounts payable is like a cash inflow.6. Cash flow from investing activities
Cash flow from investing activities refers to the cash generated or lost from investing activities of the business. Cash generated from investments made by the business is a cash inflow. If the business purchases property with cash, its cash balance will fall and will be reflected as a cash outflow in the cash flow statement.7. Cash flow from financing activities
Cash flow from financing activities refers to the cash earned or spent to fund the company. If the company pays out dividends in cash, it is a cash outflow.8. Cash flow statement all together
All together, a cash flow statement looks as shown. Notice how amounts are being added and subtracted from the net income - this is the indirect method of preparing a cash flow statement. We get the net cash flow by summing up the net cash flows from operating, investing and financing activities.9. Let's practice!
Now that we know the basics of the cash flow statement, let's put our knowledge to the test by practicing some exercises.Create Your Free Account
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