June 5, 2020

The Statement of Cash Flows

The Statement of Cash Flows shown by a company, provides information about the money inflows and outflows within a certain period of time, and it can predict the future cash flows of the company. It keeps track of company’s cash and categorizes it into either operating routines, investing activities, or financing routines.

Operating activities use the items situated on the income statement and convert them from accrual basis to money basis accounting. Investing activities show the purchases and sales of long term investments. Financing activities show the changes in long term liability and stockholders equity accounts. Having to pay dividends is also displayed under financing activities. With that said, all three varieties of activities are shown on the Declaration of Cash Flows.

This declaration is very useful for a company itself, in addition to future employees and outside businesses looking in. People want to see an upcoming employer that has a lot of cash, brings in lots of revenue, and has minimum expenses. The particular Statement of Cash Flows can present these future employees where the money is coming from and where it is going.

When preparing the Statement of Cash Flows, the company uses details from comparative balance sheets, the current income statement, and specific deal data related. Comparative Balance Linens allow the company to compare the possessions, liabilities and stockholders’ equity in one year to the next. The current income statement provides the net income, which is the first calculation on this statement. Lastly, the specific deal data related gives the company extra insight on where the cash is going or where it may have come from. For example , additional data might consist of facts about the company’s purchase of common stock.

There are two types of format a company can use to provide their Declaration of Cash Flows. There is the immediate method and the indirect method. The direct method is used by deducting cash disbursements from operating cash statements. The format shows the net money provided by operating activities. The second method, the indirect method, begins simply by determining the change in money. To do so, the company finds the net cash flow from operating activities and then the web cash flows from investing plus financing activities. Once they establish these three things, they are ready to prepare their finalized statement.
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They provide all of the cash flows for each of these routines, and then it results in the net alter in cash and the net money at the end of the period.

I personally think that the particular indirect method provides the company and other people looking at the statement, the broader background of the inflows and outflows of cash within the business. The direct method is to the point and still useful in many business situations, yet I think the detailed format from the indirect method shows so much more. Being a future employee, I would look to observe that the company is earning cash, and using their cash wisely within helpful operating, investing, and financing activities. Having the stability as a company to create a profit is the main goal of any organization. It is a very important task to obtain, and the Statement of Cash Flows is one way to illustrate that type of success. Like mentioned before, it relies heavily on other statements plus data. As a whole the financial claims of a company are crucial, and what will be even more important is that they correctly display the company’s financials.

The Statement of Cash Flows is an important piece of the company’s financial statements. It shows the company’s inflows and outflows of cash and what future cash may be like for the company. The information comes from three major sources and there are 2 methods of preparing the statement. The first method is called the direct method, and the second method is called the indirect technique. I prefer the indirect method because it is more detailed and revealing. It also offers a link between itself, the Income Statement and the Statement of Financial Position. Overall, it is successful and essential way of analyzing a company’s manage on cash, and employees should take a look into their future employer’s Statement of Cash Flows.

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