Cash Flow Statement

Cash Flow Statement

The statement of cash flows is one of the main financial statements. The basic purpose of a statement of cash flows is to provide information about the cash receipts and cash payments of a business entity during the accounting period. The cash flow statement reports the cash generated and used during the time interval.

Classifying Cash Flows into Three Categories

Both the direct and indirect methods divide cash flows into three categories:

* Operations

* Financing

* Investing

CASH FLOWS STATEMENT: DIRECT METHOD

Operating Activities

The operations section gives us an idea of how much cash the organization generated in its day-to-day delivery of its products and services. This number can and should be compared with the operating income on the income statement.

Cash inflows from operating activities include:

* Cash receipts for the sale of goods or services

* Cash receipts for the collection or sale of operating receivables (receivables arising from the sale of goods or services)

* Cash interest received

* Cash dividends received

* Other cash receipts not directly identified with financing or investing activities.

Cash outflows for operating activities include:

* Cash payments for trade goods purchased for resale or use in manufacturing

* Cash payments for notes to suppliers or trade goods

* Cash payments to other suppliers and to employees

* Cash paid for taxes, fees, and fines

* Interest paid to creditors

* Other cash payments not directly identified with financing or investing activities.

To prepare the operating activities section, certain accounts found in the current assets and current liabilities section of the balance sheet are used to help identify the cash flows received and incurred in generating net income.

Cash collections from customers: This consists of sales made for cash (cash sales) and cash collected from credit customers. The activity in the accounts receivable...