Statement of cash flows
Cash is the company’s most liquid source, and therefore it affects liquidity, operating capability, and financial flexibility. Statement of cash flow must report on entity’s cash inflows, cash outflows, and net change in cash from its operating, investing and financing activities during the accounting period in a manner that reconciles the beginning and ending cash and cash equivalents balances.
Statement of cash flow helps interested parties determine if an entity needs external financing or it is generating cash flow, meeting obligations, and paying dividends.
Sometimes companies with a high income could still have a negative cash flow (phantom profits)
Thus The primary purpose of a statement of cash flows is to provide information about the cash receipts and payments of an entity during a period.
A secondary purpose is to provide information about operating, investing, and financing activities.
if an entity reports financial position and results of operations, it must present a statement of cash flows for any period for which results of operations are presented. The statement of cash flows is thus part of a full set of financial statements.
Cash flow per share, however, is not reported
A statement of cash flow is required as a part of full set of F/S for all business entities (both publicly held and privately held). also the statement of cash flows can be prepared for non-for profit organizations and governmental units.
Notes
1- Cash flow from operating activities includes collections of interest on loans and other financial instruments and receipt of dividends on equity securities.
2- Cash flow from operating activities includes payment of interest to lenders and IRS payments for income taxes.
3- Changes in deferred income tax are included in Cash flow from operating activities.
4- Amortization of premium or discount on bonds payable is included in Cash flow from operating activities.
5- Income from an equity method investee is included in Cash flow from operating activities.
6- FASB allowed entity’s to use direct or indirect method to present Statement of cash flow, The FASB expresses a preference for the direct method However, if the direct method is used, a separate reconciliation based on the indirect method must be provided in a separate schedule. For this reason, most firms simply employ the indirect method (called reconciliation method).
7- Direct method is called income statement method, it is rarely used and should include at least the following categories:
- Cash received from customers
- Cash paid to vendors
- Cash paid for interest
- Cash paid for taxes
- Cash paid for operating expenses.
8- The Statement of cash flows requires footnote disclosure of any significant non-cash investing and financing activities such as issuing of stocks for fixed assets or conversion of debt to equity, Assets obtained by assuming liabilities or entering into lease agreements, Capital assets received as gifts, Exchange of a noncash asset or liability for another.
9- When using indirect method, both interest paid and income tax paid need to be disclosed in full amounts.
10- Increase or decrease in Notes receivable is reported in investing activities section.
11- Increase or decrease in Notes payable is reported in financing activities section
12- Cash dividends paid to the company’s shareholders is reported in financing activities section.
The limitations of the statement of cash flows include the following
- There is not always common agreement on what is an operating flow and an investment or financing flow.
- Some analysts complain that the option to use the indirect method of reporting cash flows (which is used by approximately 97% of reporting companies) instead of the direct method may be hiding important information.