Cash Flow Statement

INTRODUCTION

The cash flow statement exists to provide information about the company's actual cash - not accounting - receipts and disbursements. 

Stakeholders will look at this to assess the company's ability to generate positive cash, pay its bills, pay dividends, and any needs it might have for debt. They'll also use this to see the differences between net income and cash receipts/payments. 

REPORTING OBJECTIVES

Idea here is to report on the cash effects of a company's operations, investments, and financing transactions. 

CLASSIFICATION OF CASH RECEIPTS AND PAYMENTS

CASH FLOWS FROM OPERATING ACTIVITIES - anything that's not either investing or financing. Here's where you're producing and selling goods, providing services. Generally P&L stuff. 

• Cash Inflows - sales of goods and services, collections on A/R. Interest or dividends received. Anything else that's not financing or investing-related. 
• Cash Outflows - payments for COGS, G&A, suppliers, employees. Taxes, duties, fines. Interest. Anything else that's not investing or financing. 
  

CASH FLOWS FROM INVESTING ACTIVITIES - making and collecting on loans, acquiring or disposing of debt or equity. Property, equipment, other productive assets here. 

• Cash Inflows - collections or sales of loans. Sales of equity instruments, returns of those. Sales of plant assets, other productive assets. 
  
• Cash Outflows - disbursements for loans made by the firm, payments to acquire debt or equity, payments to buy PP&E. 
  

CASH FLOWS FROM FINANCING ACTIVITIES - borrowing money, repaying that money. 

• Cash Inflows - $ from selling debt or equity.
• Cash Outflows - distributions to owners, repayments of amounts borrowed, treasury stock, any other principal payments. 
  

FOREIGN CURRENCY CASH FLOWS - report the reporting currency using FX rates @ weighted average. Report the effect of FX changes on cash balances in foreign currencies. 

NON-CASH ACTIVITIES - anything non-cash which is significant should be reported in a separate footnote, in schedule form. 

​REPORTING CASH FLOWS FROM OPERATING ACTIVITIES

DIRECT METHOD - this is preferred method. Minimum requirements:

• Cash from customers
• Interest/divs received
• Other operating cash inflows
• Payroll, COGS, opex, etc. 
• Interest/taxes
• Other operating cash payments

A reconciliation of net income to net CF from operations is provided in a separate schedule. 

INDIRECT METHOD - taxes and interest paid should be reported in a separate schedule. 

STEPS

• Step 1 - Determine net change in cash & equivalents for the year
• Step 2 - Determine net CF from Operating activities
  
• Step 3 - Analyze each remaining account to determine category
  
• Step 4​ - Prepare SCF!