The Statement of Cash Flows presented by a company, provides information about the cash inflows and outflows within a certain period of time, and it can predict the future cash flows of the company. It keeps track of company’s cash and categorizes it into either operating activities, investing activities, or financing activities.
Operating activities use the items located on the income statement and convert them from accrual basis to cash basis accounting. Investing activities show the purchases and sales of long term investments. Financing activities show the changes in long term liability and stockholders equity accounts. Paying dividends is also displayed under financing activities. With that said, all three types of activities are shown on the Statement of Cash Flows.
This statement is very useful for a company itself, as well as future employees and outside companies looking in. People want to see a future employer that has a lot of cash, brings in a lot of revenue, and has minimum expenses. The Statement of Cash Flows can show these future employees where the cash is coming from and where it is going.
When preparing the Statement of Cash Flows, the company uses information from comparative balance sheets, the current income statement, and specific transaction data related. Comparative Balance Sheets allow the company to compare the assets, liabilities and stockholders’ equity from one year to the next. The current income statement provides the net income, which is the first calculation on this statement. Lastly, the specific transaction data related gives the company additional insight on where the cash is going or where it may have come from. For example, additional data might include facts about the company’s purchase of common stock.
There are two types of formatting a company can use to provide their Statement of Cash Flows. There is the direct method and the indirect method. The direct method is used by deducting cash disbursements from operating cash receipts. The format shows the net cash provided by operating activities. The second method, the indirect method, begins by determining the change in cash. To do so, the company finds the net cash flow from operating activities and then the net cash flows from investing and financing activities. Once they establish these three things, they are ready to prepare their finalized statement. They provide all the cash flows for each of these activities, and then it results in the net change in cash and the net cash at the end of the period.
I personally think that the indirect method provides the company and other people looking at the statement, a broader background of the inflows and outflows of cash within the company. The direct method is to the point and still useful in many business situations, but I think the detailed format of the indirect method shows so much more. As a future employee, I would look to see that the company is earning cash, and using their cash wisely within helpful operating, investing, and financing activities. Having the stability as a company to make a profit is the main goal of any organization. It is a very important task to achieve, and the Statement of Cash Flows is one way to illustrate that type of success. Like mentioned before, it relies heavily on other statements and data. As a whole the financial statements of a company are crucial, and what is even more important is that they correctly display the company’s financials.
The Statement of Cash Flows is an important piece of a company’s financial statements. It shows the company’s inflows and outflows of cash and what future cash will look like for the company. The information comes from three major sources and there are two methods of preparing the statement. The first method is called the direct method, and the second method is called the indirect method. I prefer the indirect method because it is more detailed and revealing. It also provides a link between itself, the Income Statement and the Statement of Financial Position. Overall, it is successful and important way of analyzing a company’s handle on cash, and employees should take a look into their future employer’s Statement of Cash Flows.