Preparing a Cash Flow Statement has become an integral part of the financial reporting system. Aside from presenting reports on how much a business entity earned as Net Income and of its Net Worth for a given period, it has been mandatory since 1987, to provide information by way of a Cash Flow Statement on how business funds were obtained and used rationally.
Business owners therefore must require periodic submission of an Income and Expense Statement, a Balance Sheet and a Cash Flow Statement. That way, the summarized results of business operations and administration are available for periodic review and analysis, in order to determine impact, progress, and for pinpointing areas that need improvement.
Components of a Cash Flow Statement
Simply stated, a Cash Flow Statement (CFS) presents a summary of how much funds entered the business, and of how much of those funds were used during the period.
The CFS is structured in a way that will reflect how the end-of-period Cash and Cash Equivalents reconcile with the Net Income after all funds generated and disbursed for Operational Activities, Investing Activities and Financing Activities, and other non-cash elements have been taken into account.
Cash Equivalents by the way refer to short term investments held by a business, as they can be easily sold and converted into cash at any given time.
Cash Flow Coming from Operational Activities
In this section, the CFS presents the total revenues earned by the business entity throughout a period, purely derived from operating the business, whilst mainly using the entity’s assets. In addition, this section also shows how much of the revenues generated were used in paying off related operational and administrative costs for the same period.
Non-cash values such as depreciation, accruals and unearned portion of revenues occuring during the period of operation will likewise be presented in this section, but as reconciling items.
Cash Flow from Investment Activities
Investment earnings pertain to funds generated thru non-operational activities but still involving the assets of the business; such as selling of long-term assets like property and equipment, as well as earnings collected from maturing investment ventures like marketable securities and other cash equivalents.
In the same way, any amount used in purchasing property and equipment, including software, and/or placed as investment in marketable securities shall be reflected under this section.
Cash Flow from Financing Activities
Financing funds increase the size and composition of the business capital or equity, like those obtained from borrowings including funds acquired by way of bonds, or from issuances of additional shares of stocks.
On the other hand, other factors may change the composition of the business capital, like repayment of borrowings including interests, and/or payment of dividends.