Statement of Cash Flows – The movement of the company’s cash in one period is very important to report in order to know the performance of operational activities. The container used to report the movement of the company’s funds in one period is called cash flow.
The cash flow statement has its own procedure for preparing it so that information can be conveyed by stakeholders in a systematic manner. The role of the cash flow statement is important as one of the decision-making instruments in the future. The following is a complete review of the statement of cash flows.
Definition of Statement of Cash Flows
The cash flow statement is a container for recording cash movements, both cash in and out of the company, in a certain period. Cash flow is a report that will describe how the company’s ability to generate income and pay obligations.
Broadly speaking, the contents of the cash flow statement are information data regarding cash receipts and disbursements. The function of cash itself for the company is none other than as a source of funds to carry out operational activities.
In general, cash in the company is divided into 2 types, namely, petty cash and cash in the bank. The cash flow statement will typically contain the movement of all of the company’s cash funds. Furthermore, in cash flow, there are some basic elements that must be loaded. The elements in question will be explained in the following points.
Each financial report has its own function and purpose. Likewise, the cash flow statement has a different purpose from the statement of changes in equity, profit and loss statement, and various other financial reports which are discussed in detail in the book Easy Ways to Prepare Financial Statements for Service Companies .
Elements of Cash Flow
There are three basic elements contained in the statement of cash flows, namely operating, investing and financing activities. These three activities are related to the company’s main operational activities to generate profits which of course have an impact on cash movements.
The first type of cash flow element is operating activities related to the payment of company liabilities and receivables. The company’s obligations that must be paid using cash flow include operational expenses and payment of employee salaries.
Investment activity in the report describes cash receipts due to the company’s product sales process. In addition, there are also activities that cause a decrease in cash, but increase other assets. One example is buying a new machine.
The last element in the statement of cash flows is investment activity related to long-term investments. There are also funding activities that are marked by an increase in cash and long-term liabilities, one of which is borrowing capital from a bank.
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Cash Flow Objectives
The preparation of flows as a part of the company’s financial statements is of course based on specific objectives. Cash flow will help to determine the condition of the company, from cash receipts and disbursements to operational activities.
The purpose of preparing a statement of cash flows is to serve as a basis for future forecasts. This will relate to the decision making that will be carried out by the company, based on the cash flow statements in that period as discussed in the Financial Statement Audit book below.
The next thing that underlies the preparation of cash flow statements is to analyze the company’s ability to pay off its obligations. Cash is the most fluid form of asset, so it needs to be reported so that it can be allocated properly.
The statement of cash flows also has a relationship with the net income generated by the company in one period. Cash flow is useful for evaluating how the smoothest movement of assets is and its effect on the net profit received by the company.
The company can also determine follow-up long-term investment activities to be carried out in the next period. The purpose of this report is to describe the company’s cash position in a simpler way, so that it is easy to understand.
Cash flow statement
Many things will be known by the company from preparing cash flow statements in a certain period. The company will know how its financial structure is, both regarding liquidity and solvency in one period.
The company’s decision-making in the future can also be analyzed in the cash flow statement. The amount of cash remaining in that period will affect the ability to carry out operational activities in the next period.
The process of preparing a cash flow statement requires a balance sheet in the previous period and the latest income statement. The company can also check the correctness of the preparation of the cash flow statement through the journal for the period concerned. Learn how through the book Easy to Read Financial Statements below.
Of course, the company will not be able to develop its operational activities properly without using cash. This one asset is considered the most liquid because it is easily liquidated to meet the company’s operational needs.
Parties who will use the cash flow report are not only the company’s internal management, but also creditors, investors and other parties. This will have an impact on the possibility of the company to increase profits in the next period.
Sample Cash Flow Statement
In the picture above there is an example for a cash flow statement. This template can be downloaded directly on Microsoft, please visit the following page => 12-month cash flow statement
Benefits of Statement of Cash Flows
There are many benefits for internal and external parties of the company from this cash flow statement. The benefit of the first cash flow statement is to help provide information regarding the company’s ability to generate these current assets in the following period.
External parties can also find out how much the company’s ability to pay dividends on the investment invested. The movement of cash flows in the report helps creditors to find out the company’s ability to settle its obligations.
The success rate of the company in one period can be measured systematically using the cash flow statement. The incoming and outgoing cash funds will help the company to find out the net profit it has earned.
In order to be able to master writing cash flow and other financial reports, Sinaumed’s can use the book Preparation and Analysis of Regional Government Financial Statements as a reference.
Classification of Cash Flows
The classification of cash flow statements is based on the flow consisting of two kinds, namely cash inflow and outflow. Cash inflow is related to company transactions that generate income for the company.
Cash inflow transactions are related to cash receipts in the form of sales of production. There are also other activities related to investments that generate profits. Cash inflow is also included in the company’s income due to the disposal of the company’s fixed assets.
The next cash flow is cash outflow which results in spending company funds. This form of expenditure can be used to finance operational activities or those related to the settlement of the company’s long-term obligations.
Spending cash flows to finance operational activities, one example is to purchase raw materials and pay production costs. While the form of expenditure to pay long-term obligations is the payment of dividends.
Methods of Establishing Cash Flows
There are 2 methods used to prepare cash flow statements, namely direct and indirect. The two methods have fundamental differences in their preparation, especially in their components. Sinaumed’s can learn about it in the book Secrets of Mastering Financial Reports Quickly with Basic Accounting .
The cash flow statements through the two preparation methods have the same function, but the systematics are different. The following is a review regarding the two methods of preparing cash flow statements, both direct and indirect.
1. The Direct Method
Preparation of cash flow statements using the direct method based on journals related to cash and bank checking accounts. This method uses information related to the company’s operating activities in its preparation.
Company revenues and expenses will be grouped based on operating activities. In the next section, cash receipts and disbursements will be recorded from investing and financing activities.
Statements of cash flows using the direct method take a little longer to compile the details of the three elements of activity. However, the accuracy of the direct method cash flow statement results can still be accounted for.
2. Indirect Method
The statement of cash flows of the indirect method is prepared with three complete elements. The source of data from the indirect method cash flow statement is the income statement for the period concerned. The income statement is used to determine the company’s net income.
The next data source used as a benchmark in preparing the indirect method cash flow statement is the balance sheet for the following period. The preparation of cash flow is done by comparing the balance sheet and income statement.
The usefulness of the data comparison between the most recent income statement and the balance sheet for the following period is used to monitor the movement of cash-related instruments. Companies can also find out the rate of increase in cash-related instruments.
Cash Flow Components
There are several components of the cash flow statement that need to be included so that the results can contain all the elements properly. Each component of this cash flow needs to be understood especially when comparing balance sheets and income statements. The following is a review of the cash flow components.
Cash Flow From Business Activities
The first cash flow component relates to the company’s business activities, namely profit. The recording can be done by looking at the income statement for the period in question to find out how much profit was earned.
The next step, the profit will be used as a benchmark to determine the development of the company. Profits will be accumulated with cash receipts and disbursements in one period to find the value of the addition or reduction.
The company’s net profit will be calculated to determine the value of cash available to date. The decrease or increase in cash value itself will be influenced by operational activities that can affect profit value.
Cash Flow From Investing Activities
The increase in cash flows from investing activities was due to a decrease in the value of fixed assets. The opposite condition will occur if there is an increase in the value of fixed assets resulting in a decrease in cash flow.
A decrease in cash flow due to an increase in the value of fixed assets will occur because at that time the company is declining. Each expenditure of company funds will result in a decrease in the cash balance, resulting in a decrease in the current value.
The sale of fixed assets resulted in the company receiving an inflow of funds, thus causing the cash flow to increase. While the disposal of other assets in the form of equipment is not the focus of cash flow, but on the receipt of funds.
Cash Flow From Funding Activities
The company’s long-term liabilities will be included in financing activities. The method of recording the funding activity is carried out as it should, that is, the positive and negative balances are written as they are.
As an illustration, a decrease in bank debt is one type of financing transaction that results in a decrease in cash. The transaction is written as a decrease in cash which is recorded as a negative item marked with a minus sign.
Transactions with increases in company capital fall into the category of increases in cash flow due to increasing company funds. The increase in capital is recorded as a positive transaction which is written fairly, without using any special symbols.
The transfer of the long-term liabilities and equity columns in the balance sheet directly into one nominal column which is only distinguished by brackets. The different signs used to write the nominal will indicate increases and decreases in cash flows.
Total Cash Activities
Total cash activities are the total value of the company’s funds from the previous three activities, namely operations, investment and funding. These three activities will be totaled to find out the increase or decrease in cash in one period.
As an illustration, the company has decreased cash due to operating activities of IDR 6,000,000. In investing activities, the company also experienced a decrease in cash flow of IDR 3,500,000. Meanwhile, the company’s funding activities experienced an increase in cash value of Rp. 11,000,000.
The next step that needs to be done is to add up the three elements of cash. The sum of these three elements will determine the increase or decrease in cash flow.
The formula used to determine the increase or decrease in cash flow is quite easy, namely operating (activities+investing)+(activities+financing)-activities. From the sample company data, the calculation results from the previous example are: (6,000,000)+(3,500,000)-11,000,000 = 1,500,000
The results of these calculations show that the company experienced an increase in cash flow of IDR 1,500,000. The increase in cash value is recorded as a positive transaction in the company’s cash account.
Cash Beginning Balance
The last component in the cash flow statement is the cash beginning balance or cash beginning balance. The balance is obtained from the previous period’s balance sheet which will be used as comparison material.
In the process of recording this opening balance, the account that is of concern is cash only. The initial cash balance will be recorded in the first column in making a cash flow statement. Furthermore, the balance will be affected by transactions in other activities.
After that, the company just needs to add to the initial balance with the increase in cash flow that has been experienced in one period. The result of this sum will form a new cash balance that will be used to carry out operational activities for the next period.
An increase in cash in the company will show that the business being run is experiencing growth. This can be used as a benchmark that the company will be able to fulfill all obligations in the next period.
Why is Cash Flow Important?
There are several reasons why the process of preparing cash flows is important to do. Many parties need a cash flow statement for a business in one period for various purposes. It is important to prepare cash flows to meet these needs.
Seeing from the company’s internal needs, the preparation of cash flows is important to consider in various needs in decision making. The following is a review of why cash flow is important, especially for internal companies.
The first reason underlying why cash flow is important is to control the company’s financial condition. Cash flow will help to describe the use of company funds in one period.
Finances will be well controlled through cash flow, so that the company can make the best use of the funds it has. This is also intended to anticipate any unusual cash disbursements.
One type of financial report is also effective in providing information about the differences in net cash flow and net income. Net cash flow focuses on the activities of cash receipts and disbursements in one period, so as to be able to leave the latest balance.
Net profit is generated from all aspects of the company’s operational activities, which will produce products, both goods and services. Sales of these goods or services will be used to calculate profit, added to various other operational aspects.
The last thing that underlies the importance of making cash flow reports is to make it easier for companies to manage debts and receivables. The company will be able to predict its ability to pay off obligations by analyzing cash flows.
Until here, do you understand cash flow and the preparation of the report? For the company this is very important and will have an impact on its development. For this reason, the report must be properly prepared.