The statement of cash flow or a cash flow statement sums up the entire inflow and outflow of cash of the business. It tells you about where the money came from into the business that is all the receipts and where it was spent that is all the cash that was paid. The business world uses the cash flow statement as an accounting tool with balance sheets and income statements. It depicts how the changes in your balance sheet account and income affect the cash and similar to cash and it analyzes the business in three sections such as investing, operating and financing.
Cash Flow statement
The two most used accounting tools in the business are profit and loss statements and cash flow statements. They both have their own different use. The projection of profit and loss is for analysing cash flow and is often done monthly. Cash flow statements are made at the end of the accounting year and are a part of a much bigger financial statement. These statements are made to ascertain how the business is fairing. This is achieved by making sure only cash-based transactions are included in the income statement.
Many business owners think that the cash flow statement is the most honest financial statement. It is most often used by investors than other statements to ascertain a business's value and performance because it is very difficult to fake a cash flow statement.
Operating Enterprises
Everyday business transactions and revenue-generating operations are called operating activities. For example, buying inventory, making a sale, royalties, commissions, wage payment and operation expenses, lawsuits and fines. The main thing you should focus on in a cash flow statement is Net Cash Flow from operations. This part shows in detail about-
Investing activities
Payments that are made to purchase assets for a longer period and cash received from asset sale can be classified as investing activities. Purchase and sale of assets such as equipment and property can be included in investing activities. When principal amount of loan is collected and money is lent to someone along with the sale and purchase of investment securities also falls under investing activities. This part categorizes-
Long term assets from the balance sheet
Any activity that changes the borrowing or equity of the business will be a financing activity. When you repay loans, borrow from creditors, collect any money from investors, pay dividends and repurchase or issue stocks are all considered financing activities. They are associated with-
How to prepare a cash flow statement
You must maintain all cash transactions then preparing cash statement will be very easy. You can simply categorise receipts and payments in their categories which is known as the direct method. Using this method, the information can be directly associated with the following cash flow triggers-
