Finance for Newbies- Cash Flow Statement

The Cash Flow statement, true to its name, is a statement that captures inflow and outflow of cash (and cash equivalents) during a given time period. The cash flow statement is often seen as a true reflection on a company's financial health.

A cash flow statement is different from the income statement and balance sheet in that the former does not take accrued income/expenses into consideration. Accrued income/expenses refer to income/expenses likely to arise in future. A good example of accrued income is accounts receivable: amount due from customers that the company expects to receive some time in future.

A cash flow statement typically starts with the Net Income (PAT) obtained in the income statement. To the net income:

• All non-cash expenses, like depreciation, are added.
• All non-cash income, like credit sales, are reduced.
• Capital expenditure that entailed cash outgo are reduced.
• Sale proceeds of capital goods and investments are added.
• Cash utilized to pay dividends, repay debt, and repurchase shares are reduced.
• Proceeds of shares issued and loans raised are added.

Here's what a cash flow statement would look like:

Net Income
Operating Activities
Additions

• Depreciation
• Increase in accounts payable
• Increase in taxes payable

Subtractions

• Increase in inventory

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Investing Activities

Additions

• Sale proceeds of machinery

Subtractions

• Purchase of equipment

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Financing Activities

Additions

• Debentures issued

Subtractions

• Dividend payable

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Cash Flow for the period

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Here's a link to a sample cash flow statement.