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# Cash Flow Statement CFS Definition, Calculation, & Example

August 16, 2024
Bill Kimball

The cash flow statement is an essential financial statement for any business as it provides critical information regarding cash inflows and outflows of the company. In the above example, the business has net cash of \$50,049 from its operating activities and \$11,821 from its investing activities. It has a net outflow of cash, which amounts to \$7,648 from its financing activities. A cash flow statement (CFS) is a financial statement that captures how much cash is generated and utilized by a company or business in a specific time period. The cash flow indirect method uses the information from the cash statement to calculate the cash flow within a certain period.

## How to prepare a statement of cash flows using the indirect method

The indirect method of preparing a statement of cash flows is a technique that begins with the net profit from the income statement, which is then adjusted for non-cash items such as depreciation. The indirect method is based on accrual accounting and is generally the best technique since most businesses use accrual accounting in their bookkeeping. Cash flow statements, just like all financial statements, can be prepared manually.

## How to Create a Cash Flow Statement Using the Indirect Method

It is called the indirect method because the cash flows are not used directly for the calculation, but are determined from the turnover. The sale of company stock for financing can be recorded in this section, along with repurchase of stock, dividend payment, debt repayments (as long as it is for a financing activity). Any payment going out is a negative change, and any payments received are positive changes.

## Cash Flow from Financing Activities

For example, if a customer buys a \$500 widget on credit, the revenue is recognized in the month of the sale, even though the cash hasn’t yet been received. The indirect method of presentation is very popular, because the information required for it is relatively easily assembled from the accounts that a business normally maintains in its chart of accounts. The indirect method is less favored by the standard-setting bodies, since it does not give a clear view of how cash flows through a business. For an investment company or a trading portfolio, equity instruments or receipts for the sale of debt and loans are also included because it is counted as a business activity.

## What Are Operating Activities?

1. Decreases in net cash flow from investing normally occur when long-term assets are purchased using cash.
2. Cash flows from investing activities always relate to long-term asset transactions and may involve increases or decreases in cash relating to these transactions.
3. The main components of a cash flow statement are cash flows from operating activities, investing activities, and financing activities.
4. Transactions that do not affect cash but do affect long-term assets, long-term debt, and/or equity are disclosed, either as a notation at the bottom of the statement of cash flow, or in the notes to the financial statements.
5. It has a net outflow of cash, which amounts to \$7,648 from its financing activities.

Using the indirect method, calculate capital expenditures by subtracting last period’s fixed assets total from this period’s. Target spent just over \$1.4 billion on property and equipment and earned \$10 million in cash from selling or disposing equipment and property. Any other cash flow from assets, such as investment income, would appear in this section. You start with revenue and subtract out all expenses to discover what is left.

## Which Method Does the Financial Accounting Standards Board Prefer?

To reconcile net income to cash flow from operating activities, add increases in current liabilities. Under the direct method, cash flow from operating activities is shown as actual cash inflows and outflows without starting from net income on an accrued basis. The investing and financing sections are prepared similarly for indirect and direct methods. The indirect method starts with net income and then removes noncash items, nonoperational gains, and losses to calculate cash flow from operating activities. Adjustments are made for changes in connector accounts to convert accrual accounting figures to cash balances.

Changes in this section of the statement of cash flows come from actions the business takes to finance its operations. The direct method for preparing a statement of cash flows lists cash inflows and outflows as they occur. The Financial Accounting Standards Board (FASB) prefers that businesses use the direct method to develop the statement of cash flows. Since most firms use accrual accounting, they typically use the indirect method.

The indirect method is simpler to prepare than the direct method because most companies keep their records on an accrual basis. For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing. The changes in the value of cash balance due to fluctuations in foreign currency exchange rates amount to \$143 million.

As a result, the business has a total of \$126,475 in net cash flow at the end of the year. Thus, when a company issues a bond to the public, the company receives cash financing. In contrast, when interest is given to bondholders, the company decreases its cash. It can be considered as a cash version of the net income of a company since it starts with the net income or loss, then adds or subtracts from that amount to produce a net cash flow figure.

Cash flow statements are important as they provide critical information about the cash inflows and outflows of the company. This information is important in making crucial decisions about spending, investments, and credit. Positive cash flow reveals that more cash is coming into the company than going out. This is a good sign as it tells that the company is able to pay off its debts and obligations. Negative cash flow typically shows that more cash is leaving the company than coming in, which can be a reason for concern as the company may not be able to meet its financial obligations in the future. However, this could also mean that a company is investing or expanding which requires it to spend some of its funds.

Details relating to the treatment of each of these transactions are provided in the following sections.

The financial health of a large corporation cannot be accurately assessed using the direct cash flow method. This is because a large business has many variable sources of income, as well as expenses. Using the direct method does not take into account outstanding accounts. Assume that you are the chief financial officer of a company that provides accounting services to small businesses. Further assume that there were no investing or financing transactions, and no depreciation expense for 2018.

This method measures only the cash received, typically from customers, and the cash payments made, such as to suppliers. These inflows and outflows are then calculated to arrive at the net cash flow. Analysts look in this section to see if there are any changes in capital expenditures (CapEx). Other activities include settlement collections, loaning money, and collecting on loans you have made. This section deals with investing activities, like purchasing shares of stock—not financing activities such as securing funding. Keeping in mind the size of a small business, the direct method better fits the workflow.

Stockholders’ equity transactions, like stock issuance, dividend payments, and treasury stock buybacks are very common financing activities. Debt transactions, such as issuance of bonds payable or notes payable, and the related principal payback of them, are also frequent financing events. Changes in long-term liabilities and equity for the period can be identified in the Noncurrent Liabilities section and the Stockholders’ Equity section of the company’s Comparative Balance Sheet, and in the retained earnings statement.

For Propensity Company, beginning with net income of \$4,340, and reflecting adjustments of \$9,500, delivers a net cash flow from operating activities of \$13,840. Investing net cash flow includes cash received and cash paid relating to long-term assets. The indirect method, starting with net income and adjusting for noncash items and balance sheet changes, is simpler and more commonly used, especially by larger firms, because it’s efficient and easy to prepare. Therefore, it should always be used in unison with the income statement and balance sheet to get a complete financial overview of the company. The cash flow statement is useful when analyzing changes in cash flow from one period to the next as it gives investors an idea of how the company is performing. Another important function of the cash flow statement is that it helps a business maintain an optimum cash balance.

The indirect method doesn’t require all of the documentation and preparation that the direct method does. For this reason, it’s preferred by many when reviewing cash statements internally. Sometimes there is a fourth category that provides an area to record other cash flows.