Cash flow statement (CFS) shows details on how cash position has changed. The statement is derived from balance sheet (BS) and shows adjustments that resulted in cash flow impact.
CS is divided into 3 parts:
Cash flow from operating activities:
Shows cash flows that are related to revenue generation of the company.
2. Inventory purchases
3. Change in accounts receivable
4. Equipment depreciation
Cash flow from investment activities:
Shows cash flows that are related to activities that are not part of activities related to revenue generation activities of the company.
1. Purchase of machinery
2. Interest on investments
Cashflow from financing activities:
Shows cash flows that are related to equity and debt financing.
1. Sale of shares
2. Debt payments
CFS can be prepared using direct or indirect method. Direct method is most common.
Indirect method example:
Therese are two BS statements from beginning and the end of the year:
The difference between the accounts are taken:
CSF using indirect method will always start with net income. It will then make adjustments to add back decreases in accounts that did not generate cash outflow and deduct amounts from changes that resulted in cash inflow.
Based on calculations above, we can compile the following CFS: