Knowing how to prepare a cash flow statement is crucial for a company's chief financial officer because a cash flow statement delivers vital data about the company's operating activities to interested parties. From potential lenders and investors to employees, CEOs and shareholders, the cash flow statement will reveal plenty about the financial health of the business and help decision-makers chart a course for the future.
What Is A Cash Flow Statement?
A cash flow statement is an annual report that covers three segments of the company's financial operations: the investment activity, the financing activity and the operating activity. Each segment breaks down certain aspects of the cash flow and can reveal warning signs that certain areas are in trouble. The numbers to create a cash flow statement generally come from balance sheets, income statements and transaction data.
Investing Activities
This part of the cash flow statement reveals information about assets, including disbursements related to investments, property purchases, equipment or machinery purchases, receipts from the sale of assets, stock purchases or receipts from the sale of any other type of investment.
Financing Activity
This section of the cash flow statement deals primarily with a company's debt. Hard numbers for this section include payments on any financing, dividend payouts, capital returns, receipts from issuing stock and receipts from loans.
Operating Activity
When preparing this section of the cash flow statement, it's important to cover all the principal aspects of the business. This should include detailed reports on the payroll and bonuses, rent or mortgage payments, receipts from sales, taxes and utilities. Also included in this section are all the payments to vendors and suppliers.
Direct Versus Indirect Preparation Methods
Most cash flow statements are prepared using two methods-direct and indirect. The direct method shows the direct inflow and outflow of cash without adjusting the net income. The indirect method adjusts the net income and the net cash flow. The indirect method is most commonly used by finance officers.
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