Cash Flow Statement Definition
The cash flow statement, defined as a financial statement that shows a company’s cash inflows and cash outflows over a period of time, is one of the most important financial statements of a company. The balance sheet includes an asset account labeled “cash.” The statement of cash flows shows how the company’s operating, investing, and financing activities affected the cash account during the fiscal period. In conclusion, use the statement of cash flows to analyze the financial health of a company.
Cash Flow Statement Explanation
Cash flow statements divide a company’s activities into three categories, including the following:
- Operating activities
- Investing activities
- Financing activities
Operating activities refer to the company’s core business operations. Whereas, investing activities refer to changes in long-term asset and investment accounts. Financing activities refer to changes in debt and equity accounts. Furthermore, the statement details the cash inflows and outflows for the accounts in each category over the course of the fiscal period.
The bottom line of the cash flow statement, which accounts for the net cash inflows and outflows of all accounts during the fiscal period, must equal the balance of the cash account on the balance sheet.
Cash Flow Statement: Direct Method VS. Cash Flow Statement: Indirect Method
There are two ways to prepare the operating activities section of a cash flow statement, including the following:
- The direct method
- The indirect method
Apply these methods only to operating activities. Always prepare investing activities and financing activities the same way. Therefore, preparing the operating activities section of the cash flow statement either way yields the same results. Furthermore, the indirect method is required by industry regulations, so companies always report cash flows using the indirect method. However, if they so choose, they can also report cash flows using the direct method.
The direct method shows cash inflows and cash outflows for each of the operating activities. The indirect method, on the other hand, makes a series of adjustments to the company’s net income in order to account for the affects of noncash transactions recorded using accrual accounting. Both methods give the same result.
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Cash Flow Statement Template
A cashflow statement template can be found here:S.C.O.R.E. template gallery