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Managerial Accounting Cash Flow Statement. Format of cash flow statement, Preparation of cash flow statement, explanting of operating, investing and financing activities of enterprises.
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The primary purpose of a cash flow statement is to provide information about an entity's cash receipts and cash payments during a period. Secondary objective is to provide information on a cash basis about its operating, investing and financial activities.
Cash flow statement therefore reports cash receipts, cash payments, and net changes in cash resulting from operating, investing and financing activities of an enterprise during a period, in a format that reconciles the beginning and ending cash balances.
The information in a cash flow statement should help investors, creditors, and others assess the following.
The entity's ability to generate future cash flows.
The entity's ability to meet obligations and pay dividends.
The reasons for the differences between net income and net cash flow from operating activities.
The cash and non cash investing and financing transactions during the period. A reader of financial statements can better understand why assets and liabilities increased or decreased during the period. For example the following questions might be answered.
How did cash increase when there was a not loss for the period?
How were the proceeds of bond issue used?
How was the expansion in plant and equipment financed?
How was the retirement of debt accomplished?
How much money was borrowed during the year?
Is cash flow greater or less than net income?
Cash flow statement classifies cash receipts and cash payments by operating, investing and financing activities. Transactions and event characteristics of each kind of activity are as follows.
Operating Activities
Operating activities involve the cash effects of transactions that enter
into the determination of net income, such as cash receipts from sales of
goods and services and cash payments to suppliers and employees for
acquisition of inventory and expenses
Investing Activities
Investing activities generally involve long term assets and include
(a) making and collecting loans (b) acquiring and disposing of investments
and productive long lived assets.
Financing Activities
Financing activities involve liability and stock holder's equity items and
include obtaining cash from creditors and repaying the amounts borrowed and
obtaining capital from owners and providing them with a return on, and a
return of, their investment
Below is the typical classification of of cash receipts and payments of business enterprise according to operating, investing and financing activities.
| Operating Activities: Cash inflows: From sales of goods or services. From return on loans (interest) and on equity securities. dividends Cash outflows: To suppliers for inventories. To employees for services. To government for taxes. To lenders for interest. To others for expenses. Investing Activities: Financing Activities:
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Income Statement Items
Generally Long Term Asset Items
Generally Long term Liability and Equity Items |
Some cash flow relating to investing or financing activities are classified as operating activities. For example, receipts of investment income ( interest and dividend ) and payment of interest to lenders are classified as operating activities. Conversely, some cash flows relating to operating activities are classified as investing or financing activities. For example, the cash received from the sale of property plant and equipment at a gain, although reported in the income statement, is classified as an investing activity, and effects of the related gain would not be included in net cash flow from operating activities. Likewise a gain or loss on the payment of debt would generally be part of the cash out flow related to the repayment of the amount borrowed, and therefore it is financing activity.
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