Statement of cash flows
Statement of Cash Flows
I. Purpose of the statement
The statement of cash flows reports the cash effects of a company's operations for a period of time. The main purpose is to provide financial information about the cash receipts and cash payments of a business for a specific period of time. This helps investors, creditors and other external users about a company’s cash position. The statement shows the cash effects of a company's operating, investing, and financing activities. The statement of cash flows indicates the net increase or decrease in cash during the period as well as the ending cash balance.
It helps to answer some questions such as,
- where did cash come from during the period,
- how was the cash used,
- what was the change in cash balance during the period?
II. Cash flow activities
A. Operating activities
Operating activities include cash flow from the sale of a company's product and the collection of payment from customers. Cash flow from operating activities includes cash receipts from sales of products and payments to suppliers and employees. It also includes receipts on the sales of loans, dividends received, tax and interest payments made.
B. Investing activities
Investing activities include cash flow from the sale and purchase of long-term assets. Cash flow from investing activities includes receipts from selling and expenditures for buying plant and equipment. It also includes collections on loans for selling and payments on loans for collecting another company's debt instruments.
C. Financing activities
Financing activities include cash flow from investors and shareholders for issuing shares as well as the cash outflow to shareholders in the form of dividend payments. It also includes the proceeds of issuing short-term or long-term debt and payments for the repurchase of company shares.
III. How to calculate cash flow
The following is an example of a company's comparative balance sheet, income statement information, a few hints for calculating cash flow, and finally an example of a statement of cash flow.
Comparative balance sheet of Company X at December 31, 2000 and 1999:
| Dec. 31, 2000 | Dec. 31, 1999 | “Change in” | |
|---|---|---|---|
| Assets | |||
| Cash | $184,200 | $124,600 | 59,600 increase |
| Accounts Receivable | 202,800 | 148,700 | 54,100 increase |
| Inventories | 250,000 | 275,000 | 24,500 decrease |
| Prepaid expenses | 5,400 | 4,500 | 900 increase |
| Land | 85,000 | 85,000 | |
| Buildings | 575,000 | 465,000 | 110,000 increase |
| Accum. Depr—Building | (192,000) | (168,000) | 24,000 decrease |
| Machinery & Equipment | 345,800 | 345,800 | |
| Accum. Depr—Machine & Equip. | (134,000) | (99,000) | 35,000 decrease |
| Patents | 39,500 | 45,000 | 5,500 decrease |
| Totals | $1,362,200 | $1,226,600 | |
| Liabilities and Stockholders’ Equity | |||
| Accounts payable | $114,500 | $132,400 | 17,900 decrease |
| Dividends payable | 14,500 | 12,000 | 2,500 increase |
| Salaries payable | 8,900 | 10,900 | 2,000 decrease |
| Mortgage note payable, due 2001 | 65,000 | 65,000 increase | |
| Bonds payable | 105,000 | ||
| Common stock, $1 par | 25,000 | 5,000 | 5,000 increase |
| Paid in capital in excess of par –common stock | 150,000 | 50,000 | 100,000 increase |
| Retained earnings | 984,300 | 896,300 | 88,000 increase |
| Totals | $1,362,200 | $1,226,600 |