A cash flow statement indicates flow of cash into and out of a business organization. In most cases, an organization’s cash in hand is lower than operations, although both have to be equal and this is attributed by outstanding bills still not paid by customers. A cash flow statement helps managers:

1. Establish the changes in a company’s cash at hand from the activities undertaken over a given reporting period.
2. Determine the company’s sources and uses of cash.
3. Understand operating results throughout a given operating period.

There are three types of financial activities detailed in a cash flow statement, which include operating activities, investing activities, and financial activities. A cash flow statement can take two forms: direct format and indirect format.

1. Direct method: categorizes main classes of cash receipts and cash payment differently.
2. Indirect method: focuses differentiating net income and net cash flow from a company’s operations. This is the commonly used method due to its ability to offer a limited amount of information.

A cash flow statement can be compiled with the company’s balance sheets and income statements of two years/accounting periods (Heakal, 2010). In calculation of statement of cash flow, line items in which cash was used are adjusted from the net income. The cash flow statement includes line items found in the balance sheets. Net income line items from the income statement are also needed, in addition to income tax expenses and depreciation expenses (Heakal, 2010). A cash inflow on a cash flow statement is positive while cash outflow is negative. The operating activities include an adjustment part and the remainder part that indicates the necessary changes needed to reflect cash on hand after changes in the balance sheet items. Other line items in cash flow statements whose change is of significant influence include inventories, accounts payable and accrued liabilities.

Adjustments, on the other hand, refer to cash flow changes based on components of the income statement that do not need cash. These include amortization, depreciation or deferred income taxes. Cash in a company can be spent in various activities, among them investing activities to help the company grow. These activities include:

1. Mergers or acquisitions
2. Major improvements to existing buildings
3. Major upgrades to existing factories and equipment
4. Purchase or sale of marketable securities
5. Purchase or sale of property, plant, and equipment

The operating activities’ bottom line indicates how much cash a certain company has spent or generated from its operating activities. The other side of the cash flow statement represents the financing activities that need money to fund operations. To gain this money, a company can raise it from outside sources if it lacks enough internally. The bottom line of financing activities shows the net cash used to finance the business.
Forbes School of Business Faculty

Reference:
Heakal, R. (2010). What is a cash flow statement? Forbes. Retrieved from http://www.forbes.com/2010/05/27/cash-flow-statement-personal-finance-securities-analysis.html

Assignment

Referencing this week’s readings and lecture, describe the following terms as they relate to the statement of cash flows: cash, operating activities, investing activities, and financing activities. What can creditors, investors, and other users glean from an analysis of the statement of cash flows?