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    Saturday
    Sep132014

    How to prepare a cash flow statement

    A statement of cash flows contains information about the flows of cash into and out of a company, and the uses to which the cash is put. The statement is comprised of three sections, in which are presented the cash flows that occurred during the reporting period relating to the following:

    • Operations
    • Investing activities
    • Financing activities

    The statement of cash flows is part of the financial statements, and as such is heavily reviewed by the users of the financial statements.

    The most commonly used format for the statement of cash flows is called the indirect method. The general layout of an indirect method statement of cash flows is shown below, along with an explanation of the source of the information in the statement. The sources of information appearing in the table can be used to prepare a cash flow statement.

    ABC Company
    Statement of Cash Flows (indirect method)
    for the year ended 12/31/20X1

    Line Item Derivation
    Cash flows from operating activities
     
    Net income
    From the net income line on the income statement
    Adjustments for:
     
      Depreciation and amortization
    From the corresponding line items in the income statement
      Provision for losses on accounts receivable
    From the change in the allowance for doubtful accounts in the period
      Gain/loss on sale of facility
    From the gain/loss accounts in the income statement
      Increase/decrease in trade receivables
    Change in trade receivables during the period, from the balance sheet
      Increase/decrease in inventories
    Change in inventories during the period, from the balance sheet
      Increase/decrease in trade payables
    Change in trade payables during the period, from the balance sheet
    Cash generated from operations
    Summary of the preceding items in this section
       
    Cash flows from investing activities
     
    Purchase of fixed assets
    Itemized in the fixed asset accounts during the period
    Proceeds from sale of fixed assets
    Itemized in the fixed asset accounts during the period
    Net cash used in investing activities
    Summary of the preceding items in this section
       
    Cash flows from financing activities
     
    Proceeds from issuance of common stock
    Net increase in the common stock and additional paid-in capital accounts during the period
    Proceeds from issuance of long-term debt
    Itemized in the long-term debt account during the period
    Dividends paid
    Itemized in the retained earnings account during the period
    Net cash used in financing activities
    Summary of the preceding items in this section
       
    Net change in cash and cash equivalents
    Summary of all preceding subtotals


    A less commonly-used format for the statement of cash flows is the direct method. The general layout of the direct method statement of cash flows is shown below, along with an explanation of the source of the information in the statement:

    ABC Company
    Statement of Cash Flows (direct method)
    for the year ended 12/31/20X1

    Line Item Derivation
    Cash flows from operating activities  
    Cash receipts from customers
    Summary of the cash receipts journal for the period
    Cash paid to suppliers
    Summary of the cash disbursements journal for the period (less the financing payments noted below)
    Cash paid to employees Summary of the payroll journal for the period
    Cash generated from operations Summary of the preceding items in this section
       
    Interest paid
    Itemized in the cash disbursements journal
    Income taxes paid Itemized in the cash disbursements journal
    Net cash from operating activities Summary of the preceding items in this section
       
    Cash flows from investing activities
     
    Purchase of fixed assets Itemized in the fixed asset accounts during the period
    Proceeds from sale of fixed assets
    Itemized in the fixed asset accounts during the period
    Net cash used in investing activities Summary of the preceding items in this section
       
    Cash flows from financing activities  
    Proceeds from issuance of common stock Net increase in the common stock and additional paid-in capital accounts during the period
    Proceeds from issuance of long-term debt Itemized in the long-term debt account during the period
    Principal payment under capital leases Itemized in the capital leases liability account during the period
    Dividends paid Itemized in the retained earnings account during the period
    Net cash used in financing activities Summary of the preceding items in this section
       
    Net change in cash and cash equivalents Summary of all preceding subtotals

     
    Related Topics

    Statement of cash flows overview
    Direct method
    Indirect method
    What is a funds flow statement?

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