Accounting category archive

A cash flow statement is a document that shows the general handling of cash in the company. This financial report does not depict profits or losses, but rather tracks the company’s flow of cash. This type of statement features complete transactions, from the opening balance to the smallest changes in the balance sheets.

This statement serves as an excellent analytical tool, making it an important asset when applying for business credit loans. A positive trend in the cash flow statement indicates that the company has the capacity to clear all its debts and other impending bills when due, thus providing an accurate status statement to both clients and the bank. This statement also enables the company owner to remain vigilant. When made public, it serves to keep investors informed about the company’s peformance.

Cash flow is generally determined by three activities:

1. Operating activities – Cash flow for activities at a corporate level, production and sales.

2. Investment activities -Cash flow if the company has made investments.

3. Financing activities- This refers to the cash/loans that the company has procured from various investors and the bank.

For the cash flow statement to be accurate, all the cash inflow and outflow has to be properly tracked. Here follow two ways to prepare the statement:

1. The direct method: This is the simpler method to prepare a cash flow statement, All of the cash flow activities are listed under the relevant headings, adding and subtracting as required.
2. The indirect method: This method, (which is slightly more complicated), lists physical assets and cash which are calculated and tallied under different headings.