Statement of cash flows

Eduzendium article

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