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So what is A Cash Flow Statement?

Basically the Cash Flow Statement describes the sources and uses of a company’s over a specified time period i.e. explains the changes in cash and cash equivalents during a period.

P&L or the income statement, which is prepared by accrual accounting is more of a view – A company may show profits and not generate any cash at all. The cash flow statement is a real statement and neutralizes the impact of the accrual entries on the other financial statements.

What is the structure of the cash flow statement?

It categorizes the sources and uses of cash to provide the reader with an understanding of the amount of cash a company generates and uses in its operations, provided by sources outside the company – borrowed funds or funds from stockholders, etc. The cash flow statement also tells the reader how much money was spent for items that do not appear on the income statement, such as loan repayments, long-term asset purchases, and payment of cash dividends.

Cash flow statements classify cash receipts and payments according to whether they stem from operating, investing, or financing activities.

What are the methodologies to create the Cash Flow Statement?

We may prepare Cash FLow Statement using the direct or indirect method. Usually in the S1 filing, you would find the indirect cash flow statement. We can also derive the cash flow statement using the indirect method. Obviously not all line items might match with the statement published by the company, but broadly the sense of the statement would be achieved.

Creating a financial statement is a tricky process if you are doing it for the first time. But once you know the algorithm, then creating the cash flow statement is like playing hangman – just make sure that you get the steps right.

There are two important steps (and one optional):

1. Categorizing the Balance Sheet Items in Operating, Investing and Financing Activities

2. Calculating the changes in Balance Sheet items and remembering that increase in assets is decrease in Cash

3. (If Required) Match the P&L numbers to the difference in Balance Sheet

Analyzing and Classifying Balance Sheet Items

In this tutorial we discuss the first step in creating the Cash Flow Statement – Classifying the items in the Balance Sheet. Basically the classification has to be in one of the three parts of business :

  • Operational: Anything related to core operations of the business (Sale, Purchase, Inventory, etc.) that has a short term (<1 Year) impact

  • Investing: Anything that has a long term (> 1 year) implication (Plant, Machinery, Capital Expenditures, etc.)

  • Financing: Changes in sources of funds (New Debt, Equity, etc.)

OperatingNet Income and Changes in working capital
[ (CA-CL)2011 – (CA-CL)2010 ]
InvestingProperty and Equipment, net, Intangible Assets, net, Goodwill
FinancingDifferences of all Long-Term Liabilities and Share Holders Equities

(Read More: Cash Flow Statement)

Categorizing the Balance Sheet items in Facebook

In this figure you can see how the Facebook Balance Sheet items are categorized into different activities in the Cash Flow Statement.

We hope this article has given you a better understanding on how to categorize the items of Balance Sheet in Cash Flow Statement.

Keep Modeling!