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Understanding the Cash Flow Statement – a Beginner’s Guide

A company’s cash flow statement records the movement of cash over a period of time.  Along with the balance sheet and income statement, the cash flow statement is a required element of a company’s financial reports.  The report allows for management and investors to see how a company’s operations are running, where the money is coming from and how it is being spent.

All cash transactions affect the cash flow statement in some way or another. Money that goes out like paying for salaries, equipment, loan, etc. lowers the cash. Money that comes in such as receiving customer wire transfers, interest income, stock purchases, etc. increases cash.

Non-cash transactions are a businesses activities where cash doesn’t go in and out. These transactions have no effect on the Cash Flow Statement but they do impact the Income Statement and Balance Sheet.

When a company has more cash at the end of the period than it did at the beginning of the period, the business has a positive cash flow.  On the other hand, if the company has less cash at the end then the beginning of the period, it has negative cash flow.




Cash is received by a company in two major ways;

  1. Operating activities such as receiving payment on a product that was shipped out.
  2. Financing activities such as selling stocks.

Cash is paid out by a business in four major ways;

  1. Operating activities such as paying vendors for supplies.
  2. Financial activities such as paying interest on a debt.
  3. Paying income taxes to the IRS
  4. Investing in income producing assets such as machinery.

 

Cash Flow Statement Example

Cash Flow Statement

Cash receipts – is simply cash collected from customers.  Obviously, cash receipts increase the amount of cash the company has on hand and this is reflected on the Cash Flow Statement.

Cash disbursements – is cash paid out to pay for such things as inventory, salary, rent, etc. These transactions lower the amount of cash on hand.

When cash is received the accounts receivable shown on the Balance Sheet decreases. When cash is disbursed, the amount the company owes as an accounts payable on the Balance Sheet decreases.

Cash from operations – is the flow of money that comes in and out in regards to making and selling a product. This is a good reflection on how well a company is doing as far as its daily operations.

Cash Receipts – Cash Disbursements = Cash from Operations

Fixed asset purchases – is money going out to buy property, plant and equipment (PP&E); this is a long-term investment in productive assets.

Net borrowings – is the difference between new money being borrowed and cash paid for borrowing (i.e. – interest) in the period.

Income taxes paid – is the cash amount a business pays to the Internal Revenue Service (IRS) for taxes due from income.

Sale of stock (new equity) – is the cash received from selling a stock to investors. This transaction increases the cash value of a business.

Ending cash balance – is the beginning cash balance minus or plus all cash transactions that took place in the cash flow statement.

For more, watch the video below for further explanation about cash flow statements.

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