What is a cash flow?
The term cash flow means the cash flow of your business in and out of a given time period.
Cash flows come from the management, investment and financing activities of your business. In this case, the cash flows from customers, interest received on dividend investment and loan payments are all cash flows.
On the other hand, cash flows from payments made for managing your business, investing and financing activities. Examples of cash outflows include prices for goods sold, interest and principal payments and fixed asset purchases.
Purpose of the statement of cash flows
Cash flow is forward in addition to your balance sheet and income statement. The purpose of preparing cash The flow statement is simple.
At no time is your income directly correlated to the cash flow of that period. This is because the income statement represents the financial results of your operating activities over a period of time.
Also, the key concepts that apply when measuring revenue are revenue recognition and cost matching.
Accordingly, the revenue and expenses are recognized during the period of your business transaction. And these national transactions are recorded regardless of whether the cash was paid or received at that time or at a later date.
Objectives for the cash flow statement
The cash flow the statement reflects cash flows and flows from various activities of your business during a given time period.
The main goal of cash flow statement is to provide data about cash flow from managing, investing and financing your business activities.
This information is useful to multiple stakeholders in your organization. It helps them evaluate your entity’s ability to produce cash and cash equivalents; The timing and specificity of this national cash flow.
Additionally, it makes them aware of the need for your venture to use cash flows. Based on the information thus collected, stakeholders make economic decisions.
Advantages of cash flow statement analysis
Your business needs cash. This is because cash helps you manage, meet financial obligations, and provide owners with returns.
The cash flow the statement gives you a snapshot of your entity’s source and cash usage over a period of time.
So I understand why it is important to prepare a cash flow statement.
Helps evaluate cash flow users using other financial statements:
(i) The change in the net assets of your business,
(ii) Its financial structure,
(iii) Liquidity and flexibility and
(iv) Ability to generate cash flows.
It helps them adapt to changing circumstances and opportunities.
Your cash flow is not affected by various accounting treatments and earnings. Therefore, it is difficult to transfer information.
Now, it helps improve the comparability of information about operating performance of different entities.
Additionally, cash flow statement assists users in estimating cash flow. It also helps to develop their models for comparing the present value of future cash flows to different institutions.
Furthermore, cash flow reports help your business adjust cash flows and flows.
It helps you to adapt to changing circumstances. Since cash flow is used in conjunction with other financial statements, it helps to examine the relationship between profitability and net cash flow.
Finally, it gives a fair view of the impact of price changes on the cash flow of your business.
Classification of activities in the cash flow statement
The cash flows arising from the various business activities of your enterprise are the focus of the cash flow statement. These national activities are classified into three categories:
(ii) investment and
(iii) Financial activities.
1. Cash flow from operating activities
The primary earning activities in your business refer to operating activities.
These are the main activities that involve the production and sale of your products and services. For example, if your business produces a bike, it will include management activities.
Raw material collection
In the event of production expenditure,
Bicycle sales etc.
These activities do not include financing and investment activities.
Thus, cash from operating activities helps partners determine the level of transparency of your business.
It indicates the efficiency of your business activities to generate cash. It further helps maintain the operating capability of your business and meet its financial obligations.
The following is an example of cash flow from manages activities:
1. Cash flow from operating activities
Cash flows from operating activities include:
Sales of products and services
Royalties, fees, commissions, and other revenue
2. Cash outflows from operating activities
Cash flows from operating activities include:
An insurance company for premiums and annuities
3. Cash flow from investment activities
Mention investment activities
Long-term asset acquisition and disposal
Besides, investments are not considered cash equivalents.
This type of outage is mandatory. This is because these expenses help maintain the operating efficiency of your business.
These activities related to the purchase and sale of long-term assets or fixed assets such as plants and machinery, land-building.
Additionally, cash flows from investment activities to cash flow are also included
Long-term investment securities and
Investment in joint ventures or subsidiaries.
In addition to long-term asset changes, the calculation of capital expenditures also includes depreciation. This is a reduction because of the fake change of property, plant, and equipment.
Separate footnote releases should be used to show the assets and liabilities received or depreciated in the acquisition or split.
The following are examples of cash flows from investment activities:
1. Cash money comes from investing activities
Cash flows from investment activities include:
Proceeds from the sale of fixed property
Proceeds from payment of an advance payment to third parties
Loans received from third parties such as loans and advances
Other businesses receive dividends from investments
Shares, warrants or other ventures obtained by selling debt instruments
2. Cash flow from investment activities
Cash flow payments from investment activities include:
To acquire permanent property
As third party loans advance
To gain shares, record or debt instruments of other enterprises.
3. Cash flow from financial activities
Financing activities refer to the capital or long-term funds of your business
These activities are the result of changes in the proportions and structure of the owner’s capital and the arrow of your business.
The components of cash flows from financing activities include: (i) flows from taking out additional debt and equity financing and (ii) flows for debt repayment, dividend payment, and equity refinancing.
The following are examples of cash flows from financing activities:
1.Controls from cash financing activities
Cash flows from financing activities include cash payments:
Shares, Debentures, Loans, etc.
2. Cash outflow from financing activities
Cash flows from financing activities include:
Payment of cash amount borrowed
Dividend paid on equity
Interest paying interest
Preparation of cash flow statement
To understand the preparation of cash flow statement, let’s consider the income and expenditure of JS bike makers as of March 31, 2018.
Calculating cash from operating activities
To start cash flow directly, you need to review the operating income and expenses of JS Bike Cash Receipt.
This is done by evaluating JS Bike’s balance sheet and income statement. If the footnote is there, consider it.
For example, after considering the acceptance of trade at the beginning and end of the year, the cash received from customers is Rs 3.015 crore.
Similarly, cash payable to suppliers and employees after the payment of trade and list consideration at the beginning and end of the year is negative.7760 crore.
Then, in order to reach net cash flow from operating activities, you need to adjust income tax and extraordinary items.
Calculate cash flows from investment and financing activities
After reporting the cash flows from operating activities, the next step is to evaluate the income statement and balance sheet items for financing the investment and providing funds.
For example, the company has issued shares worth Rs 250,000 in 2018 and has borrowed funds through long-term 2, debt amounting to Rs 250,000.
In addition, the company acquired fixed assets of Rs.1,5,700 and sold equipment at rupees.
Lastly, cash flows from operating, investment and financing activities were added to the cash balance at the beginning of the year.
For indirect cash flows, the reporting of investment and financing activities will be the same as the direct method.
But to calculate the cash flow from operating activities you have to start with the net profit/loss of your JS bike.
33.90 lakh at the end of the same period 2018 Then Then, you need to start adjusting cash, non-operating items in net profit.
For example, depreciation, which stands at Rs. 1.5 lakh, has been added back to the original profit as it is not cash money and the same way the cash flows from the investment,
activities are deducted from the dividend income and interest income net profit.
Finally, the cash item is added to the net profit of Rs.1.5 lakh at interest expense.
After adjusting for cashless, operating items, you need to adjust for current assets and current liability changes.
What you eventually arrive at is cash flow from operating activities.