The correct explanation of Statement of Cash Flows
Statement of Cash Flows shows cash flows of the entity for a period. It also shows the changes in cash and cash equivalents during the period. Cash flows are critical for the long-term success of your business. These cash flows must be stable, positive and continuing. You need to keep a track of your cash flows, as this will enable you to have an eye on the financial health of your business. You also need to analyze your statement of cash flows as it will provide you a reconciliation of the opening and closing balance of cash.
What areCash Flows?
Inflows andoutflows of cash and cash equivalents are called cash flows.
Cash consists of cash on hand whilst cash equivalents are anything that is convertible to cash within a short period of time.
Statementof Cash Flows
You need astatement of cash flows if you want to get information about how your businessgenerated and spent cash in a particular accounting period. In a statement ofcash flows, we group inflows and outflows of cash into three differentcategories:
- Cash flows from operating Activities,
- Cash flows from Investing Activities, and
- Cash flows from Financing Activities.
Do you have in-depth understanding of balance sheet assertions ?
Format ofStatement of Cash Flows
You canprepare a statement of Cash Flows using
- Direct method, and
- Indirect method.
The main difference between these two methods is that of ‘Cash flows from operating activities. The other two sections are the same in both the direct and indirect method.
There are three types of cash flows appearing in the statement of cash flows:
- Cash Flows from Operating Activities
- Cash Flows from Investing Activities
- Cash Flows from Financing Activities
Now, let mediscuss the meaning of these three type of activities:
Cash Flowsfrom Operating Activities
Normal trading activities of a business are called operating activities. Such activities are day to day activities of a business. For example, cash from the sale of shoes is cash from operating activities of shoes selling store. Similarly, Revenue received from patients is cash flows from operating activities of a hospital because serving patients is the operating activity of a hospital.
Cash Flowsfrom Investing Activities
Cash flows from investing activities are cash received or spent on the sale of non-current assets. For example, if a business is receiving cash on the sale of its motor cars, it is termed as cash from investing activities. Similarly, if a company has purchased some motor cars, it is called as cash spent on investing activities.
Cash flowsfrom Financing Activities
Thissection of the statement of cash flows shows cash spent or cash received duringthe transactions between the company and its owners and creditors. For example,if owners are putting some money in the company, it is called as cash flowsfrom financing activities. Similarly, if the company is receiving loans or isrepaying loans, it is also called as cash flows from financing activities.
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Format ofStatement of Cash Flows
International Accounting Standard-7 (IAS &) applies to statement of Cash Flows. If we analyze IAS 7 in detail, you will not find any specific format for SOCF, however, it has some examples where we can find the format of SOCF.
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