Statement of Cash flowS
Statement of Cash flows
Statement of cash flows provides the summary of all the cash received or paid out of the business during the accounting period. It is another performance measure evaluated by the users of financial information. This statement shows how well a business performed with its available cash resources and how cash was actually earned and ultimately utilized during a given period of time. Cash flow statements are period-specific like profit and loss statements however, similar to the balance sheet, cash flow statements are merely a statement and not an account with debit and credit sides.
Cash flow statements do not include any non-cash adjustments made during the period. Examples of non-cash adjustment include expenses recorded on account of depreciation and amortization or gain recorded on disposal of assets and any gain recorded while translating foreign exchange transactions.
Cash flow statements are divided into three main categories:
Cash generated and used by the operating activities
Preparation of the cash flow statement is started from the figure of profit before tax after that all the non-cash adjustments like depreciation, impairment, gain/ loss on disposal of fixed assets, etc. are adjusted into profit and before tax. In some cases Finance cost is also added back as interest paid is separately reported for investment and financing activities. The adjustments of noncash transactions along with finance costs to the Profit before tax will drive the figure of cash flow before operating activities.
In the second portion, all the changes in the working capital from the previous year are reported. The working capital comprises current assets and current liabilities. After the adjustment of working capital, we arrive at the figure of cash generated/ (used) from operating activities during the reporting period.
Cash generated from investment activities
All the additions and disposals of long-term assets along with the addition and redemption of long-term Investments are presented as cash generated from/ (used in) the investment activities during the period
Cash flows are generated from financing activities
The third section comprises all those activities in which cash was used or generated for the financing activities. In this section, any dividend/ drawing made by the owner and interest paid to the lenders is reported. Further any new capital injected by the owners of the business or loans obtained from lenders are also reported in the section.
It is important to remember that only interest and dividends actually paid are included in the cash flow statement.
Total of both cash generated from investment and financing activities are added to the cash generated from operating activities and net cash generated/ (used) during the period is driven. The figure calculated shall be equal to the cash and equivalent at the year-end when added with the cash and equivalent of the previous year.
Statement of changes in equity
This statement represents any contributions made by the owners or any drawings/ dividends taken out by the owners from the business during the period. Any profits made or losses incurred are adjusted against the net capital contribution by the owners of the business.
Notes to the financial statement
These are the descriptive explanations of the figures included in all of the above four statements. Notes to the financial statements also include any additional information which is required by the virtue of law/ national regulation and needed to be disclosed by the business while presenting financial statements.
