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cash flow statement

source: imgress

What is a Cash Flow Statement?

In financial accounting, a Cash Flow Statement, also known as Statement of Cash Flow, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements.

The statement of cash flows is divided into three sections:

A. Financing activities

B. Operating activities

C. Investing activities

A. Cash flow from financing activities (CFF)

CFF is cash flow that comes into play from generating or letting cash through the issuance of additional equity, short or long-term debt for the firm’s operations. This covers:

(a) Cash inflow (+)

  1. Sale of equity securities

  2. Issuance of debt securities

(b) Cash outflow (-)

  1. Dividends to shareholders

  2. Redemption of long-term debt

  3. Redemption of capital stock

Reporting Noncash Investing and Financing Transactions Data for the Statement of cash flows(SOCF) is derived from three places:

  • Comparative balance sheets

  • Current income statements

  • Selected transaction data

B. Cash Flow from Operating Activities (CFO)

CFO is cash flow that comes into play from regular operations such as revenues and cash operating expenses net of taxes. This category covers:

(a) Cash inflow (+)

  1. Revenue from sale of goods and services

  2. Dividends (from equities of other entities)

  3. Interest (from debt instruments of other entities)

(b) Cash outflow (-)

  1. Payments to lenders

  2. Payments to employees

  3. Payments to suppliers

  4. Payments to government

  5. Payments for other expenses

C. Cash Flow from Investing Activities (CFI)

CFI is cash flow that comes to play through investment activities such as the acquisition or disposition of current and fixed assets. This category covers:

(a) Cash inflow (+)

  1. Sale of property, plant and equipment

  2. Sale of debt or equity securities (other entities)

  3. Collection of principal on loans to other entities

(b) Cash outflow (-)

  1. Purchase of property, plant and equipment

  2. Purchase of debt or equity securities (other entities)

  3. Lending to other entities

There are however, some investing and financing activities that don’t flow through the Statement of Cash Flow because they do not engage cash transactions.

Simple instances of this category are:

  1. Acquisition of assets through capital leases

  2. Acquisition of long-term assets by issuing notes payable

  3. Conversion of debt to equity

  4. Conversion of preferred equity to common equity

  5. Acquisition of non-cash assets like patents, licenses in exchange for equity or securities

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