Understanding the Cash Flow Statement | ABC Amega (2023)

The statement of cash flows, also known as the statement of cash flows or statement of cash flows, is one of three financial statements commonly used to measure a company's overall performance and health. The other two financial statements:balance sheetyincome statement- have been addressed in previous articles.

As the name suggests, the cash flow statement provides information about an organization's cash inflows and outflows over a period of time. Simply put, it shows how a company spends its money (output) and where that money comes from (cash in).

This statement is the best resource for testing a company's liquidity, as it shows changes over time rather than absolute dollar amounts at any given time. It is also useful for determining a company's short-term profitability.

It is important to note that the statement of cash flows mirrors that of a company.liquidity🇧🇷 not showncost effectiveness– that's what the income statement does.


Capitalflussrechnung: Acme Manufacturing

Cash flow from operations
grand income138.100 $
access to money
depreciation55.500 $
Decrease in claims13.000 $
Increase in Accounts Payable12.000 $
Increase in taxes payable8.000 $
cash withdrawals
stock increase(100.000$)
net cash from operations126.600 $
Investment cash flow
gear($ 73.000)
Financing cash flow
promissory notes10.025 $

How the cash flow statement is prepared

There are two methods of preparing the statement of cash flows: direct and indirect.

  1. Whatdirect methoduses actual cash flow information from the company's operations. Represents the main classes of gross receipts and payments. The direct method will likely be used by small businesses that hold their accounts in cash rather than accrual.
  2. Whatindirect methodderives income statement data and balance sheet changes from one period to the next. Both the income statement and the balance sheet are based on accrual accounting.

Use one:Acme Manufacturing's consolidated statement of cash flows net income for 2020 is $138,100. This amount is taken from net income shown in Acme Manufacturing's 2020 consolidated income statement.

US GAAP (Generally Accepted Accounting Principles) requires that a statement of cash flows prepared using the indirect method be included in the financial statements, even if it is also prepared using the direct method. Therefore, most companies use the indirect method and the rest of this article only covers the indirect method using Acme Manufacturing's 2020 data.

Components of the Cash Flow Statement and What They Tell Us

This statement organizes and reports cash into three categories: operations, investments, and finance.

operational activities

This represents an organization's primary source of cash generation and is considered by many to be the most important piece of information in the statement of cash flows.

This section of the statement shows how much money is generated by a company's main products or services. Strong, positive cash flow from operations (especially over time) bodes well for a healthy business.

The business starts withgrand incomeincome statement number.

Example #1: Acme Manufacturing's net income figures on the income statement and statement of cash flows are identical.

grand income
(income statement, line 16)
138.100 $242.400 $
grand income
(Statement of cash flows, line 2)
138.100 $242.400 $

If all of a company's operating income and expenses were cash, thenCash generated by operations(statement of cash flows) would be the samegrand income(income statement🇧🇷 However, this is usually not the case. Generally, the adjustment to net income in the statement of cash flows is based on an increase or decrease in cash calculated from changes inbalance sheetfrom one period to another.

[cash flow statement]

Example 2: Inventory on Acme Manufacturing's Consolidated Balance Sheet

The inventories
(balance sheet)
stock difference
(2020 a 2019)
158.600 – 58.600 =100.000

The increase in inventories in 2020 results in a negative adjustment of the same amount ($100,000) to Acme Manufacturing's 2020 consolidated statement of cash flows.

Most of these adjustment items can result in an increase or decrease in cash from operating activities. The exceptions would be depreciation and amortization adjustments, which are always an increasegrand incomein the statement of cash flows.

Look for consistent cash flows from operations over time that indicate the company is likely to continue funding its operations.

[cash flow statement]

investment activity

This section records changes to equipment, assets or investments.

Cash changes from investments are generally considered "cash outflows" because the cash is used to purchase equipment, buildings, or current assets. When a company disposes of an asset, the transaction is considered a "cash inflow". A healthy business usually continually invests in plant, equipment, land, and other tangible assets.

financing activity

Changes in debt, loans or stock options, long-term loans, etc. are reported in financing activities.

When capital is raised, it is considered a "deposit"; when dividends are paid or debts are reduced, "Cash Out". The Financing Activities section shows how borrowing affects the company's cash flow.

"end effect"

The conclusion of the statement is thatNet increase (decrease) in cash and cash equivalents.It is determined by calculating the total cash inflows and outflows for each of the three sections of the statement of cash flows.

2020Net increase (decrease) in cash and cash equivalentson the statement of cash flows must equal the difference between 2020 and 2019Cash and cash equivalentsnumbers notbalance sheet.

Example 3: Acme Manufacturing 2020 Balance SheetNet reduction in cash and cash equivalents


cash flow statement

Net Cash (Operating Activities)

– Net liquidity (investment activity)

+ Net liquidity (financing activities)

$126,600 (operating)
– $73,000 (Invest)
+$10,025 (financing)
$226,600 (operating)
– $83,500 (invest)
+$12,025 (financing)
final result63.625 $155.125 $

[cash flow statement]

Additional information

There is a fourth section entitled "Supplementary Information" which is usually included in the first three sections of the statement of cash flows. Reports on the exchange of needs such as B. Stocks of companies against non-cash corporate bonds.

This section also records the amount of income tax and interest paid. Acme Manufacturing's consolidated statement of cash flows does not include any supplemental information.

Using the Statement of Cash Flows to Determine an Organization's Financial Health

The demo shows how a company raised money (cash) and how it spent those funds over a period of time. It is an instrument that measures a company's ability to cover its expenses in the short term.

In general, a company is considered to be in "good shape" if it consistently makes more money than it spends. Cash flow reflects a company's financial health and its ability to pay its bills and other obligations.

In most cases, the more money you have to run the business, the better. However, low or negative cash flow in one year may result from a company's growth strategy and therefore not be a real problem. As with any financial analysis, it is important to determine the company's cash flow.Trend.

“High Quality” Net Income

To determine whether a company's net income is "high quality," compareCash generated by operationstowardgrand income🇧🇷 Both amounts can be found on the statement of cash flows. This oneCash generated by operationsmust be consistently (over time) greater thangrand income.

Usage 3:In Acme Manufacturing's consolidated statement of cash flows, you can see that net cash generated from operations in 2020 is less than net income. That's not a good sign. However, it is important to understand where the decline is coming from, so further analysis over a longer period would be helpful.

Financial metrics based on cash flow

The problem with using the balance sheet for liquidity analysis is that it only presents data that measure where the organization is at any given time.

The problem with the income statement is that it contains many non-cash allocations, accounting conventions, provisions and reserves that have nothing to do with cash.

Using the statement of cash flows for liquidity analysis provides a more dynamic picture of the resources a company has to meet its ongoing financial obligations.

1.Cash flow from sales = Cash flow from operations ÷ Nettoumsatz

This ratio determines how much money is generated for every dollar of sales. Obviously, the higher the number, the better.

Example #4: Cash Flow from Acme Manufacturing to Sales

Cash generated by operations
(cash flow statement)
liquid sales
(income statement)
Money generates sales for every dollar
2020$ 126.600 ÷$ 1.864.000 =0,06 $o6%
2019$ 226.600 ÷$ 1.790.200 =0,13 $o13%

Is this good or bad? At first glance, six cents of cash generated for every dollar of sales in 2020 isn't good, but it's not bad either. Worryingly, though, Acme Manufacturing's cash flow to sales is down seven cents year over year, which is cause for concern. For a more accurate assessment, you need to compare this performance against industry benchmarks and understand the cause of this decline.

[cash flow statement]

2.Operating ratio = net cash from operations ÷ net income after tax

Measures the relationship between operating cash flow and profit. The higher the percentage, the better.

Example #5: Acme Manufacturing Operations Index

Cash generated by operations
(cash flow statement)
grand income
(income statement)
operating index
2020$ 126.600 ÷$ 138.100 =91,6%
2019$ 226.600 ÷$ 242.400 =93,5%

[cash flow statement]

3.Operating cash flow ratio = cash flow from operations ÷ current liabilities

This ratio is used to assess whether an operation generates enough cash to cover current liabilities.

If the index falls below 1.00, the company is not raising enough cash and must find other sources to fund its operations.

Example #6:Acme Manufacturing Operating Cash Flow (OCF)-Verhältnis

Cash generated by operations
(cash flow statement)
total current liabilities
(balance sheet)
operating cash flow ratio
2020$ 126.600 ÷$ 558.800 =0,23 $
2019$ 226.600 ÷$ 560.800 =0,40 $

[cash flow statement]


with a view onbalance sheetyincome statementIn previous articles, Acme Manufacturing accumulated too much inventory in 2020 and it is negatively impacting its free cash flow. The general appearance of the statement of cash flows raises concerns regarding Acme Manufacturing's ability to pay its current liabilities (including payments due to creditors).

The income statement and balance sheet are important tools for assessing the health of a company. However, the cash flow statement is an important addition and should not be overlooked.

These articles will provide you with a basic understanding and the necessary tools. Use them to improve your credit decision process through screeningall these three degreesto get the best idea of ​​how a current or potential client's business is doing.

Want to know more about credit management? Check out these other articles below:

  • Basic outline for developing a credit policy
  • Cash flow and DSO
  • Fundamentals of credit and collection policy
  • Credit extensions are loans
  • Pending credit group: WIN
  • Kreditgruppen-Spotlight: NCCA
  • D/P, D/A and their use in international sales transactions
  • Analysis DuPont
  • Final and Binding Arbitration: A Faster, Less Costly Alternative to Litigation
  • Measure and manage billing efficiency with DSO
  • accounts receivable based financing
  • Resolve accounts receivable disputes
  • The proforma invoice and its value in export sales
  • understand the balance
  • Understand the income statement

For more information about our commercial collection agency services,contact ustoday at 844.937.3268!

Top Articles
Latest Posts
Article information

Author: Carmelo Roob

Last Updated: 04/04/2023

Views: 6049

Rating: 4.4 / 5 (45 voted)

Reviews: 92% of readers found this page helpful

Author information

Name: Carmelo Roob

Birthday: 1995-01-09

Address: Apt. 915 481 Sipes Cliff, New Gonzalobury, CO 80176

Phone: +6773780339780

Job: Sales Executive

Hobby: Gaming, Jogging, Rugby, Video gaming, Handball, Ice skating, Web surfing

Introduction: My name is Carmelo Roob, I am a modern, handsome, delightful, comfortable, attractive, vast, good person who loves writing and wants to share my knowledge and understanding with you.