[Commerce Class Notes] on Cash Flow Statement Pdf for Exam

A cash flow statement is a financial statement that exhibits the flow of incoming and outgoing cash in an enterprise. This statement is used to assess the ability to generate and utilize cash by assessing business gains from continuous progress and external sources for cash inflow as well as a cash outflow in terms of payments made and other input charges in the business. In short, a cash flow statement records the cash flow in a business. 

How do you Classify Cash Flow Statements?

Cash flow statements can be classified into the following categories:

1. Cash Flow Generated from Operating Activities: activities that generate significant revenue

2. Cash Flow from Investing Activities: acquisitions and disposals of long term assets and investments

3. Cash Flow from Financing Activities: activities that result in changing of size, composition and borrowing activities of a firm from other sources

What are the Objectives of Cash Flow Statements?

The cash flow statement assesses net changes in both cash and cash equivalent thus helping in the assessment of income generated through operations, financing, investing and other activities. It helps a business firm to formulate a budget plan and associated policies by assessing the cash flow statement. It also helps in managing cash efficiently.

How to Calculate Cash Flow Statements?

A cash flow statement is calculated by using two main methods: direct method and indirect method. It is important to make adjustments in the net income of a firm by adding or deducting differences in expenses, revenue, credit transactions and other non-cash things as they are evaluated in the income statement and balance sheet.

Direct Method

In the direct method of calculation, employee benefits expenses paid, cash received from trade receivables, etc., are transformed into a cash basis as items are reported on accrual data in the statement.

Indirect Method

The indirect method of cash flow statement calculation is based on the amount of net profit and loss. This includes the statements of various operational activities of a firm. It is also calculated on an accrual basis, thus, taking non-operating items into account such as interest paid, the goodwill that is written off, depreciation, etc. 

Advantages

• A cash flow statement helps a business owner assess net assets.

• It helps in evaluating the cash-generating capability of a firm.

• Aids in planning policies for profit-maximizing.

• Understanding and assessing the cash flow of a firm helps in optimizing profit and sustainability.

• Helps investors get an idea and judge the risk of investing in the firm.

• Helps creditors understand a firm’s resources in terms of liquidity and other assets as well as plan a budget for the firm’s operational budget and other expenses and debts.

Limitations

Although there are huge advantages that a cash flow statement offers, there are some limitations too.

• It is mostly based on secondary data

• It does not take non-cash transactions into account

• It does not adhere to the fundamental accounting principles

• It is not a substitute for the income statement of a business

• It is not totally useful in gauging the profitability of a business.

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