Debitoor Dictionary

Accounting terms explained in a simple way

Statement of cash flows – What is a cash flow statement?

A statement of cash flows, often called a cash flow statement, is a financial statement which summarises a business’s cash transactions throughout a given accounting period.

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A statement of cash flows reflects a business’s liquidity and is therefore helpful in determining short-term viability - including a business’s ability to pay bills, payroll, and other immediate expenses. Cashflow statements are also useful for investors, lenders, or creditors who want to judge a company’s financial stability and ability to repay debts.

A cashflow statement only addresses cash and cash equivalents. Any transactions which do not directly affect cash receipts or payments – such as depreciation or bad-debt write-offs are excluded from the statement of cashflows, but may be reported in footnotes.

Organising cash flow statements

When recorded on a cash flow statement, money coming into the business is recorded as “cash inflow”, whilst money going out from the business is referred to as “cash outflow”.
A statement of cash flows further categorises all cash transactions into one of three types of activities: operating, investing and financing.

  • Operating activities: cash inflow or outflow related to the production or sale of a company’s products or services. This includes accounts receivable, as well as the purchasing of raw materials, shipping, marketing and advertising.
  • Investing activities: any changes to assets or investments. For example, the purchase or sale of an asset or any payments related to mergers or acquisition.
  • Financing activities: any cash adjustments or changes to capital, debts, loans or dividends. For example, selling stock for cash.

Presenting cash flow: indirect vs. direct methods

Cash flow statements can be prepared following two different methods: direct or indirect.

  • Direct method: under the direct method, the (net) cash flow from operating activities are calculating by taking receipts from collected from customers, receipts from cash paid to suppliers or employers, and interest or income tax paid.
  • Indirect method: under the indirect method, the cashflow statement begins with net income, followed by any additions or deductions for non-cash revenue and expenses. Many companies prefer to use the indirect method as it requires less information.