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Cashflow Tip – What the Cashflow Statement shows and tells us

images/CashFlow.jpgThe Cashflow Statement is also known as the Statement of Cashflows, and here we look at what the statement shows us. It is one of the 3 main financial statements that businesses report on – the other 2 (used most commonly) are Profit & Loss, and The Balance Sheet.

The cash flow statement reports the actual cash generated and spent during the time period stated in its heading. The period of time is chosen by the company, for example, "For the Three Months Ended 31 December, 2017" or "The Fiscal/Financial Year Ended September 30, 2018". Most common is annual at year end eg 31 Dec or 30 June for Australia.

The cash flow statement actually uses data and the CHANGES between periods from the Profit & Loss and Balance Sheet, and organises and reports the cash generated and used in the following 3 categories:

Operating, Investing and Financial activities

images/Business Cash Flow.JPG

What the Cashflow Statement shows

The profit & loss or Income Statement is prepared under the accrual basis of accounting, which means the sales/revenues reported may not have been collected yet. Similarly, the expenses reported on the income statement might not have been paid yet. You could review the balance sheet changes to determine the facts, but the cash flow statement already has integrated all that information. As a result, savvy business people and investors utilize this important financial statement.

Here are a few ways the statement of cash flows is used.

1.     The cash from operating activities is compared to the company's net income (profit/loss). If the cash from operating activities is consistently greater than the net income, the company's net income or earnings are said to be of a "high quality". If the cash from operating activities is less than net income, a red flag is raised as to why the reported net income is not turning into cash.

2.     Some investors believe that "cash is king". The cash flow statement identifies the cash that is flowing in and out of the company. If a company is consistently generating more cash than it is using, the company will be able to increase its dividend, buy back some of its stock, reduce debt, or acquire another company. All of these are seen to be good for owner / shareholder value.

3.     There are also some financial models that use the cash flow.

The statement of cash flows has four distinct sections:

1.     Cash generated from operating activities

2.     Cash generated from investing activities

3.     Cash generated from financing activities

4.     Supplemental information.

The differences in a company's balance sheet accounts from one period to the next, will provide much of the needed information. - The changes or differences - in the account balances will likely be entered in one of the sections of the statement of cash flows.

Of the four sections of the statement of cash flows, those balance sheet accounts which affect that section include -

1. Operating Activities

This section reports the net income and then converts it from the accrual basis to the cash basis by using the changes in the balances of current asset and current liability accounts, such as:

Accounts Receivable
Inventory
Prepaid Insurance
Other Current Assets
Notes Payable
Accounts Payable
Wages Payable
Payroll Liabilities
Interest Payable
Income Taxes Payable
Unearned Revenues
Other Current Liabilities

Note – as well as using the changes in current assets and current liabilities, the operating activities section may list adjustments for depreciation expense and for the gains and losses on the sale of long-term assets/investments.

2. Investing Activities

This section reports changes in the balances of long-term asset accounts, such as:

Long-term Investments
Land
Buildings
Equipment
Furniture & Fixtures
Vehicles

Investing activities involve the purchase and/or sale of long-term investments and property, plant and equipment.

3. Financing Activities

This section reports changes in balances of the long-term liability and stockholders' equity accounts, such as:

Notes Payable (generally due after one year)
Bonds Payable
Deferred Income Taxes
Preferred Stock
Paid-in Capital in Excess of Par-Preferred Stock
Common Stock
Paid-in Capital in Excess of Par-Common Stock
Paid-in Capital from Treasury Stock
Retained Earnings
Treasury Stock

Financing activities involve the issuance and/or the repurchase of a company's own bonds or shares as well as short-term and long-term borrowings and repayments.

4. Supplemental Information

This section of the cash flow statement reports the amount of interest and income taxes paid as well as significant exchanges not involving cash. For example, the exchange of company shares for company bonds would be reported here.

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Accounting Software Australia, MYOB, Quickbooks, accounts software, bookkeeping software
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