How to create a Cash Flow Statement?

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Cash Flow Statement

Developing the Cash Flow Statement

1. Operating Activities. These activities are revenue-producing business activities, including cash paid to employees and suppliers and cash received from customers as well. It does not include financing and investing activities (stated in IAS 7.14). It is connected with the operational business activities such as purchasing raw materials, selling goods and services, shopping and advertising the product, and other expenses.
   
   There are two different ways of calculating operating cash flow; the direct and indirect method. It is stated in ASC 230 and IAS 7.18 that operating activities can be presented by using either direct or indirect methods. IFRS standards (IAS 7.18) consider the indirect method to be more acceptable.
   
   • Direct Method: Here, all types of actual operating cash flows are presented as a major class of gross cash payments and gross cash receipts, including cash aid for employees' salaries, cash received from customers, and cash paid to suppliers. For calculating these figures, beginning and ending balances of business accounts are used to examine net increase and decrease in these accounts. Under the direct method, the operating cash flows would be presented like this.
     
   • Indirect Method: This method reconciles net profit and loss that are recorded on the accrual accounting basis then adjusts them from non-cash transactions that have effect on net income. Net income does not exhibit accurate net operating cash flow because it is prepared based on accrual accounting. Adjustments are made by adding up and deducting all non-operating activities such as losses or profits on disposal of non-current assets, amortization and depreciation along with adjustment for changes in liability and assets accounts. Only two actual cash flows are included in the indirect method that is interest and income tax payments.
     For instance, when a credit sale incurs, account receivable increases. But it is a non-cash item because at the time of sale no cash was received. Thus, account receivable is deducted from net income in operating activities.
     Under the indirect method, the operating cash flows are presented like this:
     
2. Investing Activities. These activities are associated with the acquisition and disposal of long-term assets, including investments (stated in IAS 7.6). Investing cash flow includes payments related to acquisitions and mergers, loans received from customers, loans made to vendors, sale proceeds from the disposal of long-term assets, cash outflow from buying plant, property, and equipment (Capital expenditure) and cash returns on investment. Aggregate cash flows from other business units or subsidiaries relating to disposal and acquisition should be classified with specified additional disclosures and presented in investing activities (stated in IAS 7.39).
3. Financing Activities. These are activities related to the changes made in the composition and size of an entity's equity capital and borrowing structure (IAS 7.6). Financing cash flow includes cash repayment of debts, cash received from new borrowing, dividend payments, and issuance of shares. Non-cash financing and investing transactions should be excluded from the cash flow statement and should be disclosed separately in other financial statements (IAS 7.143). For example, assume ABC company makes financing expenses by issuing a discount. Such transaction makes no changes in cash flow, the transaction should not disclose in the cash flow statement.