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Understanding “Cash Flow Statement”

Posted on March 21st, 2008 by Sanjit Anand |Print This Post Print This Post |Email This Post Email This Post

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Lets start with the basic concept ;

bluWhy Is Cash So Important?"

Cash is the necessary element which runs the business. We need to know where the cash comes from (sources, or inflows) and where it is spent (uses or outflows).

  • Most of bills, Salaries, etc are paid in cash
  • Most vendors are paid in cash
    • Even on a “good day,” the small business will owe its debts in 30 days
    • Those purchasing products/services from the small business though will have 90 days to pay their debts.

gre

What is Cash Flow?

  • CF Statement is a 'flow' statement.
  • CF Statement indicates changes that took place between tow successive Balance Sheets.
  • The statement of cash flows provides a thorough explanation of the changes that occurred in a firm's cash balance during the entire accounting period.
  • The statement of cash flows reports cash receipts and payments of a company during a given period for operating, financing, and investing activities.
  • Cash includes cash and cash equivalents.

purpCash Flow & Accrual method of accounting

Cash Flows, although related to net income, are not same. This is because of the accrual method of accounting. As we know,under accrual accounting, a transaction is recognized on the income statement when the earnings process is completed, that is , when the goods and /or services have been delivered or performed or an expense has been incurred.

ora..that mean ...Cash Flow Statement

  • Cash flow statements ARE NOT budgets
  • Cash flow statements are concerned only with ACTUAL cash inflows and outflows .

An Example of the Difference Between Budgets and Cash Flows

If you take a “Prepaid insurance” for a year costing $3,000 – or $250 a month

  1. A budget will account for 12 equal installments of $250
  2. A cash flow statement will recognize a 1-time only outflow of $3,000.
  3. You can also see more details inflows and Outflows attributes at the end.

purpWhy do we need CFS as financial reporting?

  • Balance Sheet & P&L A/c is not sufficient in term of pure financial Reporting.
  • It shows the relationship of net income to changes in cash balances.
  • It reports past cash flows as an aid to:
    • Predicting future cash flows
    • Evaluating the way management generates and uses cash
    • Determining a company's ability to pay interest and dividends and to pay debts when they are due
  • It identifies changes in the mix of productive assets.
  • The statement of cash flows, along with the income statement, explains why balance sheet items have changed during the period.
  • Some time , there is legal rules to provide the cash Flow statement.

redDo you know ..What is Float?

Float refers to the difference in time between when the check is deposited and cash is received.

This makes a significant impact of your CFS.

red1Statements of Cash Flow

A statement of cash flow is one of several financial statements that public companies construct and share with their stake holders. In general this statement will include a formula or calculation that considers:

Cash and Cash Equivalents (Beginning)
+ Cash from Operations
- Cash Flows from Investing Activities
+ Cash Flows from Financing Activities
= Cash and Cash Equivalents (Ending)

bluIts all about Relation ship

This is family pack of financial reporting. The relationship among the balance sheet, income statement, and statement of cash flows:

cash flow

 

greCASH FLOW CLASSIFICATIONS- Activities Affecting Cash

Cash Activities are divided into three main categories

  • Operating activities - transactions that affect the income statement ..these are mostly used for Normal day-to-day activities
    • Cash effects of revenue and expense transactions
      • Deal with the income statement accounts
      • Included interest paid (on debt) and income taxes (to the government) which enters in the determination of net income
      • Cash receipts from sales of good and services,miscellaneous income
      • Cash payments for inventory, wages, insurance, utilities,rent
      • Changes in current asset and liability accounts from the prior year.
  • Investing activities - activities that involve (1) providing and collecting cash as a lender or as an owner of securities and (2) acquiring and disposing of plant, property, equipment, and other long-term productive assets ...like changes in long term assets and investment
  • Financing activities - activities that include obtaining resources as a borrower or issuer of securities and repaying creditors and owners..and these are basically changes in equity and non Operating Liabilities

1-6 Operating Activities

Cash Inflows are typically Understood as

  • Cash Receipts from sale of goods/rendering of services
  • Cash Received from royalties, fees, commission, etc.
  • Other operating receipts

where the cash outflow can be best understood as:

  • Cash payments to suppliers for Goods/services
  • Cash payments to employees
  • Interest and taxes paid
  • Other operating cash payments

2-6Investing Activities

Cash Inflows are typically Understood as

  • Sale of property, plant, and equipment
  • Sale of securities that are not cash equivalents
  • Receipt of loan repayments

where the cash outflow can be best understood as:

  • Purchase of property, plant, equipment
  • Purchase of securities that are not cash equivalents
  • Making loans

3-5Financing Activities

Cash Inflows are typically Understood as

  • Borrowing cash from creditors
  • Issuing equity shares
  • Issuing debt securities

where the cash outflow can be best understood as:

  • Repayment of amounts borrowed
  • Repurchase of equity shares
  • Payment of dividends

oraHow To Develop an Accurate Initial Cash Flow Projection

  • Contact vendors/suppliers and ask about payment terms
  • Check with credit card companies and get information about when the accounts will be processed as well as what the percentages are.

purpDeveloping a Cash Flow Statement

  • The cash flow statement of a small business is different than that of a corporation
  • Corporation will have operating, investing, and financing sections to their Statement of Cash Flows
  • The small business is only interested in the cash flows resulting from operations
    • Operations signifies all the cash flows in/out of the business…
  • A cash flow statement will maintain an accurate representation of the overall cash position if used effectively
  • A cash flow statement begins with expenses
    Examples of possible expenses
    • Salaries
    • Cost of Goods Sold
    • Taxes
    • Office Supplies (often underestimated)
    • Rent
    • Most important to account for EVERY expense…you have defined in system.
  • Begin accounting for revenues once done with all expenses
  • If possible, the company should separate their revenues into separate categories
    It will help focus the business on which sectors of its revenues are important and will influence the operations of the business…

redDo you know Who can utilize information processed by the SCF?

These is utilized by Management,Investors

yelCash Flow Statement in Oracle Financials?

  • Important to know, there is no seeded report that cater the need for Cash Flow.
  • Most of cash flow statement is prepared by account department.
  • We can achieve CFS by using OFA.
  • We can also generate CFS by FSG, but it is bit difficult, unless until, the format is not very simple.
  • you can pull the reports based out of data in the GL_BALANCES table.

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Posted in Basic Accounting, JumpStart | 6 Comments »Email This Post Email This Post | Print This Post Print This Post

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6 Responses
  1. Tim Ramsey Says:

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    Tim Ramsey

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    Aaron Wakling

  3. Dogn Liang Says:

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  4. Eden Says:

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  5. Cheryl G. Rodriguez Says:

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  6. R12 Report Manager goes user-friendly | OracleApps Epicenter Says:

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