What is a cash flow?
The term cash
flow means the cash flow of your business in and out of a given time period.
Cash flows
come from the management, investment and financing activities of your business.
In this case, the cash flows from customers, interest received on dividend
investment and loan payments are all cash flows.
On the other
hand, cash flows from payments made for managing your business, investing and
financing activities. Examples of cash outflows include prices for goods sold,
interest and principal payments and fixed asset purchases.
Purpose of the statement of cash flows
Cash
flow is forward in addition to your balance sheet and income statement. The purpose of preparing cash The flow statement is simple.
At no time is
your income directly correlated to the cash flow of that period. This is
because the income statement represents the financial results of your operating
activities over a period of time.
Also, the key
concepts that apply when measuring revenue are revenue recognition and cost
matching.
Accordingly,
the revenue and expenses are recognized during the period of your business
transaction. And these national transactions are recorded regardless of whether
the cash was paid or received at that time or at a later date.
Objectives for the cash flow statement
The cash flow the statement reflects cash flows and flows from various activities of your
business during a given time period.
The main goal
of cash flow statement is to provide data about cash flow from managing,
investing and financing your business activities.
This
information is useful to multiple stakeholders in your organization. It helps
them evaluate your entity's ability to produce cash and cash equivalents; The
timing and specificity of this national cash flow.
Additionally,
it makes them aware of the need for your venture to use cash flows. Based on
the information thus collected, stakeholders make economic decisions.
Advantages of cash flow statement analysis
Your business
needs cash. This is because cash helps you manage, meet financial obligations,
and provide owners with returns.
The cash flow the statement gives you a snapshot of your entity's source and cash usage over a
period of time.
So I
understand why it is important to prepare a cash flow statement.
Helps evaluate cash flow users using other financial statements:
(i) The
change in the net assets of your business,
(ii) Its
financial structure,
(iii) Liquidity
and flexibility and
(iv) Ability
to generate cash flows.
It helps them
adapt to changing circumstances and opportunities.
Your cash
flow is not affected by various accounting treatments and earnings. Therefore,
it is difficult to transfer information.
Now, it helps
improve the comparability of information about operating performance of
different entities.
Additionally,
cash flow statement assists users in estimating cash flow. It also helps to
develop their models for comparing the present value of future cash flows to
different institutions.
Furthermore,
cash flow reports help your business adjust cash flows and flows.
It helps you
to adapt to changing circumstances. Since cash flow is used in conjunction with
other financial statements, it helps to examine the relationship between
profitability and net cash flow.
Finally, it
gives a fair view of the impact of price changes on the cash flow of your
business.
Classification
of activities in the cash flow statement
The cash
flows arising from the various business activities of your enterprise are the focus of the cash flow statement. These national activities are classified into
three categories:
(i)
management,
(ii)
investment and
(iii)
Financial activities.
1. Cash flow from operating activities
The primary
earning activities in your business refer to operating activities.
These are the
main activities that involve the production and sale of your products and
services. For example, if your business produces a bike, it will include
management activities.
Raw material
collection
In the event
of production expenditure,
Bicycle sales
etc.
These
activities do not include financing and investment activities.
Thus, cash
from operating activities helps partners determine the level of transparency of
your business.
It indicates
the efficiency of your business activities to generate cash. It further helps
maintain the operating capability of your business and meet its financial
obligations.
The
following is an example of cash flow from manages activities:
1. Cash flow
from operating activities
Cash flows
from operating activities include:
Sales of
products and services
Royalties,
fees, commissions, and other revenue
2. Cash
outflows from operating activities
Cash flows
from operating activities include:
Suppliers
Employees
An insurance
company for premiums and annuities
Income tax
3. Cash flow
from investment activities
Mention
investment activities
Long-term
asset acquisition and disposal
Besides,
investments are not considered cash equivalents.
This type of outage is mandatory. This is because these expenses help maintain the operating efficiency of your business.
These
activities related to the purchase and sale of long-term assets or fixed assets
such as plants and machinery, land-building.
Additionally,
cash flows from investment activities to cash flow are also included
Long-term
investment securities and
Investment in
joint ventures or subsidiaries.
In addition
to long-term asset changes, the calculation of capital expenditures also
includes depreciation. This is a reduction because of the fake change of
property, plant, and equipment.
Separate
footnote releases should be used to show the assets and liabilities received or
depreciated in the acquisition or split.
The following are examples of cash flows from investment activities:
1. Cash money
comes from investing activities
Cash flows
from investment activities include:
Proceeds from
the sale of fixed property
Proceeds from
payment of an advance payment to third parties
Loans
received from third parties such as loans and advances
Other
businesses receive dividends from investments
Shares,
warrants or other ventures obtained by selling debt instruments
2. Cash flow
from investment activities
Cash flow
payments from investment activities include:
To acquire
permanent property
As third
party loans advance
To
gain shares, record or debt instruments of other enterprises.
3. Cash flow
from financial activities
Financing
activities refer to the capital or long-term funds of your business
These
activities are the result of changes in the proportions and structure of the
owner's capital and the arrow of your business.
The
components of cash flows from financing activities include: (i) flows from
taking out additional debt and equity financing and (ii) flows for debt
repayment, dividend payment, and equity refinancing.
The following are examples of cash flows from financing activities:
1.Controls
from cash financing activities
Cash flows
from financing activities include cash payments:
Shares, Debentures,
Loans, etc.
2. Cash
outflow from financing activities
Cash flows
from financing activities include:
Payment of
cash amount borrowed
Dividend paid
on equity
Interest paying interest
Preparation of cash flow statement
To understand
the preparation of cash flow statement, let's consider the income and
expenditure of JS bike makers as of March 31, 2018.
Calculating
cash from operating activities
To start cash
flow directly, you need to review the operating income and expenses of JS Bike
Cash Receipt.
This is done
by evaluating JS Bike's balance sheet and income statement. If the footnote is
there, consider it.
For example,
after considering the acceptance of trade at the beginning and end of the year,
the cash received from customers is Rs 3.015 crore.
Similarly,
cash payable to suppliers and employees after the payment of trade and list
consideration at the beginning and end of the year is negative.7760 crore.
Then, in
order to reach net cash flow from operating activities, you need to adjust
income tax and extraordinary items.
Calculate
cash flows from investment and financing activities
After
reporting the cash flows from operating activities, the next step is to
evaluate the income statement and balance sheet items for financing the
investment and providing funds.
For example,
the company has issued shares worth Rs 250,000 in 2018 and has borrowed funds
through long-term 2, debt amounting to Rs 250,000.
In addition,
the company acquired fixed assets of Rs.1,5,700 and sold equipment at rupees.
Lastly, cash
flows from operating, investment and financing activities were added to the
cash balance at the beginning of the year.
For indirect
cash flows, the reporting of investment and financing activities will be the
same as the direct method.
But to
calculate the cash flow from operating activities you have to start with the
net profit/loss of your JS bike.
33.90 lakh at
the end of the same period 2018 Then Then, you need to start adjusting cash,
non-operating items in net profit.
For example,
depreciation, which stands at Rs. 1.5 lakh, has been added back to
the original profit as it is not cash money and the same way the cash flows
from the investment,
activities are deducted from the dividend income and
interest income net profit.
Finally, the
cash item is added to the net profit of Rs.1.5 lakh at interest expense.
After
adjusting for cashless, operating items, you need to adjust for current assets
and current liability changes.
What you
eventually arrive at is cash flow from operating activities.
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