Accountants Guide to Preparation of Cash Flow Statement

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Introduction of Cash Flow Statement

A cash flow statement is a financial statement that shows the movement of cash and cash equivalents in and out of a business during a specific period of time. It tells how much cash the company can use for its operations, investments, and financing activities. It’s like tracking all the money the business gets and spends. A cash flow statement might have a few different names, like CSF, statement of cash flow, SCF, or consolidated statement of cash flows. But no matter the name, they all mean the same thing: it’s like a special money report for a company. 

For example: it can show if the company is borrowing too much money to keep running its business, but it’s not making enough money to easily pay back those loans. This helps us understand how the company is doing with its money.

Why do we need Cash Flow Statements?

We need a cash flow statement because it helps us to understand how a business manages its cash resources, generates cash from its operations, invests in its growth, and meets its financial obligations.

A cash flow statement is important for several reasons:
  • It shows the liquidity of a business, meaning how much cash is available to pay for its expenses and debts.
  • It shows the sources and uses of cash in a business, such as operating activities, investing activities, and financing activities.
  • It shows the changes in cash and cash equivalents over a period of time, such as a month, quarter, or year.
  • It shows the difference between the income and the cash flow of a business, which may not be the same due to accrual accounting.
  • It shows the investment decisions of a business, such as buying or selling long-term assets, which affect its future growth and returns.
  • It shows the financing decisions of a business, such as borrowing or repaying loans, issuing or buying back shares, paying dividends, etc., which affect its capital structure and cost of capital.
Therefore, a cash flow statement is a useful and vital tool for the business owners, investors, creditors, and other stakeholders to evaluate the financial health and performance of a business.

Negative and Positive Cash Flow

Negative cash flow and positive cash flow are two terms that describe the net amount of cash and cash equivalents that a business receives or spends in a given period of time.

Negative Cash Flow: Negative cash flow means that a business spends more cash than it receives. This can happen when a business has high operating costs, low sales, large investments, or high debt payments. Negative cash flow can indicate that a business is facing financial difficulties or liquidity problems and may not be able to pay its bills or debts on time.

Positive Cash Flow: Positive cash flow means that a business receives more cash than it spends. This can happen when a business has high sales, low operating costs, profitable investments, or low debt payments. Positive cash flow can indicate that a business is financially healthy and solvent, and has enough cash to fund its operations, investments, and financing activities.
Cash flow is different from profit, which is the difference between revenue and expenses. A business can have positive cash flow and negative profit, or vice versa, depending on how it records its transactions using accrual accounting or cash accounting. Therefore, it is important to analyze both the cash flow statement and the income statement to get a complete picture of a business’s financial performance.

Example of Cash Flow Statement

From this CFS, we can see that the net cash flow for the 2079 fiscal year ending cash was Rs 13,31,802.72. The total cash flow before change in working capital is Rs 18,20,669.76 where the Cash Flow from Operating Activities was 12,18,378.21, total cash from investing activities was Rs (7,50,000) and at last the total cash from financing activities was Rs (450,000).

Where do Cash Flow Statement come from?

A cash flow statement comes from the financial records of a business that show the amount of cash and cash equivalents that it receives and spends in a given period of time. It is one of the three main financial statements, along with the income statement and the balance sheet.
A cash flow statement is prepared by using two main sources of information:
The income statement shows the revenue and expenses of the business for the period. The balance sheet shows the assets, liabilities, and equity of the business at the beginning and end of the period.

Statement of Cash Flow using the direct and indirect methods

A statement of cash flow using the direct and indirect methods is a financial statement that shows how a business generates and spends cash in a given period of time using different approaches.

Direct Method: The direct method shows the actual cash receipts and payments from each category of operating, investing, and financing activities. It provides more details and transparency about the sources and uses of cash in the business.
Indirect Method: The indirect method starts with the net income from the income statement and adjusts it for non-cash items and changes in working capital to arrive at the net cash flow from operating activities. It is simpler and easier to prepare than the direct method, but it does not show the individual cash transactions in the business.
Both methods result in the same net cash flow for the period, but they differ in how they present the cash flow from operating activities. The cash flow from investing and financing activities are the same under both methods.

Free Cashflow Template for Accountants

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How to Learn Cash Flow Statement from Khata Business Academy

Khata Business Academy offers two online courses that can help you learn and prepare Financial Reports including Balance Sheet, Profit & Loss, Cash Flow and Financial Projections:
  • Learn Financial Reports: This course covers the basics of financial statements preparations. You will learn how to prepare Transactional Reports, Taxation Reports, Financial Reports and Projection Reports. Recommended for accountants with 1-3 years of experience.
  • Learn NFRS For Accountants: This course covers the concepts, implementation and reporting framework under Nepal Financial Reporting Standard (NFRS) based on IFRS. NFRS is being implemented in Nepal from FY 2080-81 onwards. Recommended for account managers.
Both courses are taught by experienced Chartered Accountants and are designed to help you gain the skills and knowledge you need to succeed in a career in accounting.
If you are interested in learning more about these courses, please visit the the course landing pages below:

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