Cash Flow Statement


  1. Cash Flow Statement:-
             In Financial accounting cash flow statement also known as statement of cash flow financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalent  , and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet As an analytically tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the international accounting standard that deals with cash flow statements.
    People and groups interested in cash flow statements include:     
    • Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses
    • Potential lenders or creditors, who want a clear picture of a company's ability to repay
    • Potential investors, who need to judge whether the company is financially sound
    • Potential employees or contractors, who need to know whether the company will be able to afford compensation.

    • Methods:-

    • Direct method:-

      The direct method for creating a cash flow statement reports major classes of gross cash receipts and payments. Under IAS 7, dividends received may be reported under operating activities or under investing activities. If taxes paid are directly linked to operating activities, they are reported under operating activities; if the taxes are directly linked to investing activities or financing activities, they are reported under investing or financing activities.e business.

      Indirect method

      The indirect method uses net-income as a starting point, makes adjustments for all transactions for non-cash items, then adjusts from all cash-based transactions. An increase in an asset account is subtracted from net income, and an increase in a liability account is added back to net income. This method converts accrual-basis net income (or loss) into cash flow by using a series of additions and deductions. 
      There are three main heads of activities in the cash flow statement.
      1: Operating activities
      2: Investing activities
      3: Financing activities

       

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