Cash Flow Statement (CFS)

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on June 22, 2021

What is a Cash Flow Statement?

A Cash Flow Statement (CFS) is a financial statement primarily intended to provide information about the cash receipts and cash payments of a business during the period of time covered by the income statement. It is vital to keep track of cash flows on a continuing basis in order to keep a business healthy.

To understand cash flow, Let’s first understand cash

Cash is a company’s most liquid asset; it is the lifeblood of operations. Without adequate cash, and regardless of the amount of long-term assets that may be owned, a business cannot pay employees, creditors, taxes, dividends, or expenses. So, it naturally follows that investors, creditors, and other interested parties would want to know as much as possible about a company’s cash receipts and cash payments.
The Cash Flow Statement (CFS) shows much more about cash than do other financial statements. For example, the balance sheet simply reports how much cash is owned as of a specific date. By comparing cash as reported on a current balance sheet with cash as reported on the balance sheet at the end of the preceding year, we can see how much cash changed – but not why it changed. The statement of cash flows analyzes cash receipts and payments to show how cash was acquired during the period and how it was spent.

Explanation

The cash flow statement shows the movement in cash items that takes place over a given financial period. The object of its preparation is to reconcile the opening cash position with the closing cash position by providing a fairly detailed, and itemized, list of sources from which additional cash was generated during the period and the use to which such cash was put to.
A secondary objective of the statement of cash flows is to provide information about the financing and investing activities of a business. This statement shows various causes of variances in cash balance. Like the fund flow statement, this statement also shows inflow and outflow of cash between two time periods generally from January to 31 December.
A statement of cash flows must be included in all financial reports that contain both a balance sheet and an income statement. The cash flow statement replaced the statement of changes in financial position as the fourth required financial statement.
cash flow highlights only total cash inflow and closing cash in the end. It speaks about the short-term financial positions of a corporate. It speaks about the speed of cash being collected from debtors, stock, and other current assets, on the other hand, the use of cash in paying current liabilities.
A brief statement that shows:

  • The total amount of cash held at the beginning of the year (in the form of cash in hand, cash at bank, short-term investments, etc.)
  • The total amount of cash held at the end of the year (in the form of cash in hand, cash at bank, short-term investments, etc.)
  • Net increase, or decrease, recorded in the cash balances over the year. This is the difference between the above two figures.

A detailed statement that shows:

  • All sources from which cash was generated during the year.
  • All uses made of cash during the year.
  • Net cash flow generated during the year (i.e. the difference between the above two lists)
  • The net increase (or decrease) shown by the first statement should be equal to the net cash flow disclosed by the second statement. In the following paragraphs, we will discuss the sources from which cash is generated and the uses that are made of cash resources in a given financial period.

Classifications of Cash Flows

The statement of cash flows be classified into three separate categories of cash flows, as follows:

  1. Cash flows from operating activities
  2. Cash flows from investing activities
  3. Cash flows from financing activities

Steps to prepare the cash flow statement

Its procedure is the same as of fund flow statement, its left-hand side records various sources of cash inflows and the right-hand side records the use or outflow of cash.
(a). The sources are: Opening cash, cash from operations, issue of share capital: Issue of debentures, issue of long term loans, sales of fixed assets, and capital profits (Profit on sale of fixed assets).
(b). Application of cash or cash outflows. Cash lost in operation or cash from operation (shows no loss). Redemption of preference share, the redemption of debentures, repayment of long term loans, purchase of fixed assets for cash, payment of liabilities: Tax or Dividend.

Format/Specimen of Cash Flow Statement

Cash inflow Amount Cash outflow Amount
1. Opening Cash xxxx Payment of:
2. Cash from operations xxxx 1. Dividends xxxx
3. Long term loans xxxx 2. Tax xxxx
4. Increase in Share Capital xxxx 3. Payment of long term loans xxxx
5. Sale of fixed assets xxxx 4. Decrease in preference share capital xxxx
6. Issue of debentures xxxx 5. Purchase of fixed assets xxxx
6. Redemptions of debentures xxxx
7. Cash closing balance xxxx

Objectives

The chief objectives of the cash flow statement are as under:
1. Knowledge of cash inflow and outflow: Cash flow statement shows that what are various sources of cash inflow and where the same has been used.
2. Knowledge of Trading Profits: This statement can tell how cash is generated and where it is being used and what is the balance if it is in excess it speaks about profit.
3. Knowledge of increase or decrease in share capital: Cash flow statement highlights the change in share capital whether it is increased or decreased.
4. Knowledge of purchase or sale of fixed assets: This statement provides useful information regarding the purchase or sale of fixed assets.
5. Knowledge of increase or decrease in long term loans: This statement shows for what purpose the long term loan is raised or if a loan is paid, what is the source of payment of the loan.
6. Knowledge of increase or decrease in cash balance: This statement highlights the exact position of whether the cash increased or decreased in a specific period.
7. Knowledge of tax and dividend paid: This statement is very useful in knowing the amount which is actually paid for the purpose of tax or dividend.

Example

From the following balance sheet of Star Mills Ltd. Prepare a statement of cash flow.
Cash flow statement example
(i). Dividends paid during the year $46,000.
(ii). Depreciation on Machinery written off $28,000.
(iii). The provision for taxation was made $66,000.

Solution

Cash from operations
Cash flow statement Solution
Cash Flow Statement
Cash flow statement

Working Notes:

(1). Tax Paid
Provision for tax account - CFS
(2). Machinery Purchased
Machinery AC - CFS
(3). Business Premises A/c
Business Premises Ac - Statement of cash flows

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