Good Essay About Cash Flow Statement

Cash Flow Statement is one of the financial statements included in the annual report of the company followed by Balance Sheet and Income Statement. However, unlike others, this financial statement is prepared on cash basis only, thus providing information relating to the cash position in the company. The Cash Flow Statement is divided into three sections, namely:

Cash Flow from Operating Activities:

This is the first section in the cash flow statement and includes cash inflows and outflows resulting from the operating activities of the company. By the end, the reader is able to judge if the company is able to generate cash from its primary business activities.

Cash Flow from Investing Activities:

This section includes figures relating to cash inflows and outflows resulting from the investing activities of the company such as purchase of machinery, disposal of plant, interest earned, etc. In other words, all the capital income and expenditure are part of this section of cash flow statement.

Cash Flow from Financing Activities:

This is the concluding section of the cash flow statement and includes cash inflows and outflows resulting from transactions that affect capital structure of the company. For instance, borrowings from bank, dividend paid, debenture redemption, etc. are all included under cash flow from financing activities.
After computing final cash position under each of the three categories, ending cash balance of the company is verified using the following formula:

Operating Cash Flow

+Investing Cash Flow
+Financing Cash Flow
= Change in cash balance
+beginning cash balance
=Ending Cash Balance

Methods to prepare cash flow statement

It is noteworthy to comment that the cash flow from operating activities can be prepared under two different methods and the same are briefly discussed below:

Direct Method:

Under this method, all the line items of the income statement is converted into cash inflows or cash payments to calculate operating cash flow.

Indirect Method:

Under this method, the net income of the company is converted to operating cash flow by adjusting for non-cash transactions.

Works Cited

(2011). Understanding the Cash Flow Statement. In K. Inc, Financial Reporting and Analysis (pp. 103-106). USA: KaplanInc.