The statement of cash flows reports the uses and sources of cash in a company. Cash flow from operating activities detail cash receipts and payments from normal business operations. Cash received from sales revenue, interest, and dividends belong to one important category in this area. On the other side, cash disbursements represent payments for operating and interest expenses. Cash flow from operating expenses is often important as companies must generate cash from these activities to remain in business.
The indirect statement of cash flows is the preferable method by accounting regulators. This statement lists the cash flow from operating activities first among the three sections. Underneath the header, cash receipts come first and cash disbursements second. Each activity has its own line. This allows statement users to identify all cash flow activities easily for both receipts and disbursements.
When reporting information on the statement of cash flows, accountants list items backward from the general ledger. For example, an increase in accounts receivable results in a greater asset balance on the general ledger. Under the cash flow from operating activities, however, an increase in accounts receivable reduces cash flow. Deducting this increase is necessary because companies allow customers to pay for goods on account. Credit sales delay cash collections and reduce the total cash received for an accounting period.
Another important aspect when reporting the cash flow from operating activities is the reversal of depreciation and amortization expenses. Both depreciation and amortization are noncash expenses. While companies must record these accounting expenses to indicate the use of fixed assets, they artificially lower net income and cash reporting. The statement of cash flows adds these expenses back to cash flows in order to reverse their effects.
Expenses made each month are subtracted under the cash flow from operating activities. This is different than depreciation and amortization. As each expense represents an actual cash payment, a deduction is necessary. Only the expenses for the current period have inclusion on each statement.
The other two sections of the statement of cash flows detail investing and financing activities. Investing activities include all cash receipts and payments from the sale or purchase of property, plants, equipment, and marketable securities. These are often infrequent activities for most businesses. Financing activities detail cash movements relating to external debt financing and stock issuance. Cash receipts are the result of receiving funds from these sources, while payments result when a company repays loans or investors.
