statement of cash flow
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Three Myths of the Statement of Cash Flow.

Why Three Myths?

Because something like calculating the cash flow coming in and out of your business, that seems so simple on the surface, like look in you bank account if there is money inside you have cash flow, is actually something that is much harder to calculate.

In fact, it can be so hard that accounting myths have sprung up to account(no pun intended) for it.

So let’s get into it…

The statement of cash flows, also called the cash flow statement, is the fourth general-purpose financial statement and summarizes how changes in balance sheet accounts affect the cash account during the accounting period. It also reconciles beginning and ending cash and cash equivalents account balances.

This statement shows investors and creditors what transactions affected the cash accounts and how effectively and efficiently a company can use its cash to finance its operations and expansions. This is particularly important because investors want to know the company is financially sound while creditors want to know the company is liquid enough to pay its bills as they come due. In other words, does the company have good cash flow?

The term cash flow generally refers to a company’s ability to collect and maintain adequate amounts of cash to pay its upcoming bills. In other words, a company with good cash flow can collect enough cash to pay for its operations and fund its debt service without making late payments.


Format and Template

The cash flow statement format is divided into three main sections: cash flows from operating activities, investing activities, and financing activities.

Operating Activities

Cash flows from operating activities include transactions from the operations of the business. In other words, the operating section represent the cash collected from the primary revenue generating activities of the business like sales and service income. Operating activities are short-term and only affect the current period. For example, payment of supplies is an operating activity because it relates to the company operations and is expected to be used in the current period.

Operating cash flows are calculated by adjusting net income by the changes in current asset and liability accounts.

Investing Activities

Cash flows from investing activities consist of cash inflows and outflows from sales and purchases of long-term assets. In other words, the investing section of the statement represents the cash that the company either collected from the sale of a long-term asset or the amount of money spent on purchasing a new long-term asset. You can think of this section as the company investing in itself. The investments are long-term in nature and expected to last more than one accounting period.

Investing cash flows are calculated by adding up the changes in long-term asset accounts.

Financing Activities

Cash flows from financing consists of cash transactions that affect the long-term liabilities and equity accounts. In other words, the financing section on the statement represents the amount of cash collected from issuing stock or taking out loans and the amount of cash disbursed to pay dividends and long-term debt. You can think of financing activities as the ways a company finances its operations either through long-term debt or equity financing.

Financing cash flows are calculated by adding up the changes in all the long-term liability and equity accounts.


Here’s a tip!

Here is a tip on how I keep track of what transactions go in each cash flow section.

Operating Activities: includes all activities that are reported on the income statement under operating income or expenses.

Investing Activities: includes all cash transactions used to buy or sell long-term assets. Think of these as the company investing in itself.

Financing Activities: includes all cash transactions that affect long-term liabilities and equity. Whenever long-term debt or equity is involved, it is considered a financing activity.

Like all financial statements, the statement of cash flows has a heading that display’s the company name, title of the statement and the time period of the report. For example, an annual income statement issued by Paul’s Guitar Shop, Inc. would have the following heading:

  • Paul’s Guitar Shop, Inc.
  • Cash Flow Statement
  • December 31, 2015

Example

Here is the statement of cash flows example from our unadjusted trial balance and financial statements used in the accounting cycle examples for Paul’s Guitar Shop.

Statement of Cash Flows Example


How to Prepare a Cash Flow Statement

The statement of cash flows is generally prepared using two different methods: the direct method and the indirect method. Both result in the same financial statement showing how financial transacations affected would have affected the bank account of the company. Each method is used for a slightly different reason and typically used for different sized companies.

via Cash Flow Statement – Example | Template | How to Prepare …

Examples of Cash Flow Statement

Below are some practical examples of the Cash flow statement to understand it better.

#1 – Amazon Cash Flow Statement

Let us discuss the example of Amazon Cash flow statement for the Year 2014, 2015, and 2016 below and discuss various factors that have affected its cash flow.

 

We can see that Amazon’s Ending cash from 2014 to 2016 has increased from $14.6 Bn to $19.3 Bn. Let’s start discussing all 3 components of cash flows one by one:

#1 – Cash Flow from Operating Activities

 

source: Amazon SEC filings

Amazon’s cash flow for Operating activities has increased from around 6.8 Bn to 16.4 bn (more than double in just 2 years) which is quite impressive. One reason for that is an increase in revenue of Amazon mainly because of AWS.  From 2015 to 2016 Amazon is having some good inventory management policies because of that its “change in inventory” is going down despite an increase in revenue.

#2 – Cash flow for Investing Activities

 

Its “Cash flow from Investing Activities” primarily consists of buying property or buildings. Because of the expansion, investment on a property, etc. has increased from around $5 Bn to $7Bn. Since maturities of marketable securities are quite short, every year Amazon sells some of its securities and buys other ones mainly because of hedging purposes. The amount of bought Securities will be shown as negative cash in this section since cash goes out while buying them while sold securities will be shown as a positive amount.

#3 – Cash Flow from Financing Activities

 

Financing Activities means taking loans, debts, etc. for buying assets. In 2014, Amazon has bought long term debt of around 6.4 Bn to expand its business. That’s why in 2014 it is having positive cash flow from financing, but negative in 2015 and 2016 because now it is trying to pay off its debt.

#2 – Walmart Cash flow Statement

Walmart is a multinational retail organization which is having a chain of supermarkets, especially in the USA. It is having a net income of more than $10 Bn per year. From 2016 to 2018 its cash has decreased from $8.7 Bn to $6.8 Bn. Let’s see components of its cash flows:

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#1 – Cash flow for Operating Activities

 

Source: WMT-2018_Annual-Report

Its Cash from Operating Activities has changed from USD 27.5 Bn to $28.3 Bn. One of the major components is the depreciation of buildings. Walmart is having let of physical assets such as buildings, warehouses, etc. These are getting depreciated each year which is being recorded in Net Income because of the accounting process but that depreciation gets added back again in cash flow. It is also having a very strict policy in its working capital that’s why you will see its change in inventory and account receivable almost negligible or zero while its accounts payable is increasing every year which helps overall in increasing its cash balance.

#2 – Cash Flow from Investing Activities

 

Walmart spends a great deal of its revenue on investing in its retail store and buildings. You will see the main component of Cash flow for Investing activities in “Payment of Property and Equipment’s” which is almost consistent each year.

#3 – Cash flow for Financing Activities

 

Because of the heavy Capex purchase of buildings, it has to take a great amount of debt each year. Its Cash flow for financing has changed from -USD16.2 Bn to -$19.9 Bn for 2016 to 2018

#3 – Software AG Cash Flow Statement

Software AG is 2nd largest software vendor in Germany with revenue of around 900 million euros in 2017. Its net income in 2017 was around Euro 141 million with “cash and equivalents” at around Euro 366 million. Let’s look through various cash flow segments for this company:

#1 – Cash flow for Operating Activities

 

Source: softwareag.com

Its Cash flow from Operations has decreased from Euro 203 million to 189 million. One of the differences between the structure of the above 2 companies (Amazon and Walmart) cash flow (which were GAAP standard) and Software AG (which is IFRS) is that in the above 2 companies, the tax is shown in an only one-line item, known as a deferred tax. But here in the second row, the total tax amount for the year has been added in one line and in the other line, the tax amount paid has been subtracted.

#2 – Cash flow for Investing Activities

 

Main components of investing activities can be investing in “property, plants and intangible” and acquisition of other companies. Software AG’s investment in property, the plant has been doubled from 2016 to 2017 (from 13 million Euro to 25 million Euro) which is the main reason of the change of “Cash flow for investing Activities” from -60 million Euro to -73 million Euro.

#3 – Cash flow for Financing Activities

 

in 2017, Software AG has repurchased treasury shares worth of around 90 million Euro that is why its net cash from financing activities has gone down from (-80 million Euro to -107 million Euro).

Overall by looking at the change in Cash and equivalents, 2017 was not a healthy year for Software AG. Its net cash has decreased in 2017 by 9 million in spite of having a net income of Euro 141 million.

#4 – TCS Cash Flow Statement

TCS (Tata Consultancy Services) is the biggest software company in India with revenue of around 123,000 crores Rupees in 2018 and a net income of around 26,000 crores Rupees. It is a cash-rich company with cash and equivalents of around Rs. 5,000 crores in FY 18 compared to Rs. 4000 crores in FY 17.

 

Source: TCS.com

#1 – Cash flow from Operating Activities

Cash flow from Operations for TCS is steady at around Rs. 25,000 cr in both 2017 and 2018 which is almost the same as Net Income for the firm.

#2 – Cash flow from Investing Activities

Cash flow from Investments mainly consists of the purchase of investments include 709 crores (March 31, 2017: ` 890 crores) and proceeds from disposal/redemption of investments include ` 1,182 crores (March 31, 2017: ` 726 crores) held by TCS Foundation, formed for conducting corporate social responsibility activities of the Group.

#3 – Cash flow from Financing Activities

In FY 18, TCS has bought back shares worth Rs. 16,000 cr for the market. Also, it has paid dividends of Rs. Around 11,000 cr which are the 2 main components of its Cash flow for financing activities.

via Cash Flow Statement Examples | Analysis & Explanation of …

 

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