What You Need to Know
A cash-flow statement basically reveals cash on hand at the beginning of a given period, cash received and spent during the period, and cash remaining at the end of the period.
This formula is old, and the principle still applies, but creating a cash-flow statement is significantly more complex today than it used to be. Cash flows are divided into three categories: cash from operations; cash-investment activities; and cash-financing activities. Companies holding foreign currencies use a fourth category, the effects of changes in exchange rates.
At the same time, while a statement produced, say, monthly, may balance inflow and outflow at the end of the month, it does not mean the company was able to meet its daily cash needs—it does not mean inflow and outflow balanced every day. Hence the need for constant monitoring and the awareness that what may please the accountant need not please the financial vice president.
A standard, direct cash-flow statement for a year looks like this:
| Cash flows from operations | |
| Operating Profit | $82,000 |
| Adjustments to net earnings: | |
| Depreciation | $17,000 |
| Accounts receivable | ($20,000) |
| Accounts payable | $12,000 |
| Inventory | ($8,000) |
| Other adjustments to earnings | $4,000 |
| Net cash flow from operations | $87,000 |
| Cash flows from investment activities | |
| Purchases of marketable securities | ($58,000) |
| Receipts from sales of marketable securities | $45,000 |
| Loans made | ($16,000) |
| Collections on loans | $11,000 |
| Purchases of plant and real estate assets | ($150,000) |
| Receipts from sales of plant and real estate assets | $47,000 |
| Net cash flow from investment activities | ($121,000) |
| Cash flows from financing activities | |
| Proceeds from short-term borrowings | $51,000 |
| Payments to settle short-term debts | ($61,000) |
| Proceeds from issuing bonds payable | $100,000 |
| Proceeds from issuing capital stock | $80,000 |
| Dividends paid | ($64,000) |
| Net cash flow from financing activities | $106,000 |
| Net change in cash during period | $72,000 |
| Cash and cash equivalents, beginning of year | $27,000 |
| Cash and cash equivalents, end of year | $99,000 |
A Cash-flow statement does not measure net income, nor does it measure working capital. A cash-flow statement does not include outstanding accounts receivable, but it does include the preceding year’s accounts receivable (assuming these were collected during the year being reviewed). Any amounts charged off for depreciation, depletion, and amortization, since cash was actually spent, should be added to cash inflow. Cash equivalents are short-term, highly liquid investments, definitions of which may vary slightly by country. There are alternative ways of presenting cash flow from operations, but, however they are presented, the need for constant monitoring cannot be emphasized enough, and the more variable the daily cash flow, the greater the attention needed.
