Beruflich Dokumente
Kultur Dokumente
many business owners pay attention to the net income statement and balance
sheet and ignore the cash flow statement. A profitable company that uses accrual
accounting could even have a negative cash flow. To clearly understand if a
company can cover expenses and liabilities, its owner must regularly assess the
cash flow statement.
The Cash Flow Statement
A cash flow statement records a company's cash inflows and outflows -- the amount
of cash and cash equivalents entering and leaving a company during a specified
period. The cash flow statement enables the owner, managers, bankers and
suppliers to view the companys operations from a cash perspective so they better
understand how smoothly the operations are running, where growth funding is
coming from and how wisely the money is spent. The cash flow statement shows
sources of cash, including operations, financing and investing.
Operational Cash Flow
Operational cash flow measures cash inflows and outflows from core business
activities. This section clearly shows whether a companys revenue structure can
cover all expenditures. If the revenues cannot, the net operating cash flow will be
negative. If a company has a problem collecting on its receivables or is amassing
unsold inventory, that will be reflected in operational cash flow. Cash flow may also
vary depending on the monitoring period. Monitoring the cash and projecting
operating cash flow out of the business can identify potential shortfalls in advance.
Financing Cash Flow
When a company has insufficient operating cash, it must generate cash through
financing or investing activities. Financing cash flow measures cash generated by
financing activities, including new debt and equity plus repayments and dividends.
Changes in the liabilities and shareholders equity section of the balance sheet are
reflected here. For example, a tech company that received a venture capital
investment round will show the proceeds in the financing cash flow section. New
financing done solely to replace old financing could be a warning sign.
Investing Cash Flow
Investing cash flow measures cash generated from investing activities, including
purchases or sales of equipment, property or a subsidiary. Changes in items
reflected in the asset section of the balance sheet are recorded here. Growing
companies typically show a negative investment cash flow due to all the capital
expenditures. Struggling, asset-rich companies often show continual asset sales
that offset negative or low operational cash flow.
Periodic Review of the Cash Flow Statement
Generally, the higher the operational cash flow, the stronger the company. By
periodically reviewing the cash flow statement, rapidly growing companies can
identify the need for cash and use financing to cover the shortfalls. A troubled
company could head off financial distress by noticing negative operating cash,
minimal investing cash and significant financing cash flow. The owner who sees this
could restructure operations and revamp the financing structure
End
Importance Of Cash Flow Statement
The cash flow statement provides information regarding inflows and outflows of
cash of a firm for a period of one year. Therefore cash flow statement is important
on the following grounds.
1.Cash flow statement helps to identify the sources from where cash inflows have
arisen within a particular period and also shows the various activities where in the
cash was utilized.
2. Cash flow statement is significant to management for proper cash planning and
maintaining a proper matching between cash inflows and outflows.
3. Cash flow statement shows efficiency of a firm in generating cash inflows from its
regular operations.
4.Cash flow statement reports the amount of cash used during the period in various
long-term investing activities, such as purchase of fixed assets.
5. Cash flow statement reports the amount of cash received during the period
through various financing activities, such as issue of shares, debentures and raising
long-term loan.
6. Cash flow statement helps for appraisal of various capital investment
programmes to determine their profitability and viability.
End
Basic Accounting:
The Importance of the Cash Flow Statement
Let's take a moment to catch our breath in the discussion of the cash flow
statement, and look at all the information we've absorbed so far and the importance
of the cash flow statement in fulfilling the financial picture for the state of a
business.
The Statement of Cash Flows is the new kid on the block as a member of the
Financial Statement set. This wasn't a required piece of the financial statement set
until 1988. As a result, there are still some areas that need fine tuning; such as the
format used to report the cash flows.
The Statement of Cash Flows is the final document prepared in the
Financial Report set, and provides information that is a direct flow of information
from the Income Statement, Owner Equity Statement and Balance Sheet; therefore,
this report adds validity and accountability to the Financial Statements.
Analysts, investors, stockholders, potential investors and lenders use these reports
in order to assess the financial health of a business. Therefore, it is tremendously
advantageous to use the standard method for generating the Statement of Cash
Flows and provide the additional credibility to the financial information.
A sample Statement of Cash Flows was provided in the first article in this series.
The importance of this report and the ability to accurately read and analyze the
information is invaluable to an accountant. So, take the time to become familiar
with this report, as well as the other 3 that complete the Financial Statement set.
There are 3 major categories for the information that is reported on the
Statement of Cash Flows and they are operating activities, investing
activities, and financing activities. Between the three major areas, every
aspect of a business' transactions is covered. The resulting totals on this report are
direct flows of financial information totals from the other 3 reports in the financial
statement set. The only variance in reporting is in the operating activity area,
concerning the cash transactions. A business may choose to use an indirect or
direct method for reporting cash transactions. If a business chooses to use the
direct method, there must also be a schedule attached that is basically also the
indirect method in order to reconcile the information given in the direct method.
When we read the Statement of Cash Flows there are some basic numbers
that will help you to assess a business; they are:
Depreciation expense
Changes in inventory
Changes in the "net cash from financing activities" that doesn't reflect
equipment or building additions.
A general knowledge and good grasp of these Financial Statements, especially the
Statement of Cash Flows will provide volumes of information to the reader, and if
you're a potential investor or lender, you cannot know enough about a business
before placing your money or that of your depositors in the operations of that
business. As an accountant, general knowledge will not be enough, but it's a step in
the right direction!
End
Although cash flow statements may vary slightly, they all present data in the four
sections listed here.
CLASSIFICATIONS OF CASH RECEIPTS AND PAYMENTS
Cash from Financing
At the beginning of a company's life cycle, a person or group of people come up
with an idea for a new company. The initial money comes from the owners or is
borrowed by the owners. This is how the new company is "financed." The money
that owners put into the company is classified as a financing activity. Generally, any
item that would be classified on the balance sheet as either a long-term liability or
an equity would be a candidate for classification as a financing activity.
Cash from Investing
The owners or managers of the business use the initial funds to buy equipment or
other assets they need to run the business. In other words, they invest it. The
purchase of property, plant, equipment, and other productive assets is classified as
an investing activity. Sometimes a company has enough cash of its own that it can
lend money to another enterprise. This, too, would be classified as an investing
activity. Generally, any item that would be classified on the balance sheet as a longterm asset would be a candidate for classification as an investing activity.
Cash from Operations
Now the company can start doing business. It has procured the funds and
purchased the equipment and other assets it needs to operate. It starts to sell
merchandise or services and make payments for rent, supplies, taxes, and all of the
other costs of doing business. All of the cash inflows and outflows associated with
doing the work for which the company was established would be classified as an
operating activity. In general, if an activity appears on the company's income
statement, it is a candidate for the operating section of the cash flow statement.
Methods of Preparing the Cash Flow Statement
Capital Expenditures. This figure represents money spent on items that last a
long time such as property, plant, and equipment. When capital spending
increases, it often means the company is expanding.
Investment Proceeds. Companies will often take some of their excess cash
and invest it in an effort to get a better return than they could in a savings
account or money market fund. This figure shows how much the company
has made or lost on these investments.
Dividends Paid. This figure is the total dollar amount the company paid out in
dividends over the specified time period.
The cash flow statement is the newest of the three fundamental financial
statements prepared by most companies and required to be filed with the Securities
and Exchange Commission by all publicly traded companies. Most of the
components it presents are also reported, although often in a different format, in
one of the other statements, either the Income Statement or the Balance Sheet.
Nonetheless, it offers the manager, investor, lender, and supplier of a company a
view into how it is doing in meeting its short-term obligations, regardless of whether
or not the company is generating income.
End
KEY POINTS
Accrual accounting does not consider cash when recording revenue; in most
cases, goods must be transferred to the buyer in order to
recognize earnings on the sale. An accrual journal entry is made to record the
revenue on the transferred goods as long as collection of payment is
expected.
For a seller using the cash method, revenue on the sale is not recognized
until payment is collected and expenses are not recorded until cash is paid.
The cash model is only acceptable for smaller businesses for which a majority
of transactions occur in cash and the use of credit is minimal.
TERMS
liability
accrue
and expenses are not properly matched. The cash model is acceptable for smaller
businesses for which a majority of transactions occur in cash and the use of credit is
minimal. For example, a landscape gardener with clients that pay by cash or check
could use the cash method to account for her business' transactions .
end
When aggregated over time, the results of the two methods are approximately the
same. A brief description of each method follows:
Cash basis. Revenue is recorded when cash is received from customers, and
expenses are recorded when cash is paid to suppliers and employees.
Accrual basis. Revenue is recorded when earned and expenses are recorded
when consumed.
The timing difference between the two methods occurs because revenue
recognition is delayed under the cash basis until customer payments arrive at the
company. Similarly, the recognition of expenses under the cash basis can be
delayed until such time as a supplier invoice is paid. To apply these concepts, here
are several examples:
The cash basis is only available for use if a company has no more than $5 million of
sales per year. It is easiest to account for transactions using the cash basis, since no
complex accounting transactions such as accruals and deferrals are needed. Given
its ease of use, the cash basis is widely used in small businesses. However, the
relatively random timing of cash receipts and expenditures means that reported
results can vary between unusually high and low profits.
The accrual basis is used by all larger companies, for several reasons. First, its use
is required for tax reporting when sales exceed $5 million. Also, a company's
financial statements can only be audited if they have been prepared using the
accrual basis. In addition, the financial results of a business under the accrual basis
are more likely to match revenues and expenses in the same reporting period, so
that the true profitability of an organization can be discerned. However, unless a
statement of cash flows is included in the financial statements, this approach does
not reveal the ability of a business to generate cash.
End
The difference between cash and accrual accounting is important to understand,
whether you plan to handle your own financial statements, or hire an outside
professional. The difference lies in the timing of when sales and purchases are
recorded in your accounts. Read on to understand the implications of using each
accounting method.
Cash Based Accounting
The cash basis of accounting recognizes revenues when cash is received, and
expenses when they are paid. This method does not recognize accounts receivable
or accounts payable. Many small businesses opt to use the cash basis of accounting
because it is simple to maintain. Its easy to determine when the transaction has
occurred (the money is in the bank or out of the bank) and there is no need to track
receivables or payables. The cash method is also beneficial in terms of tracking how
much cash the business actually has at any given time; you can look at your bank
balance and understand the exact resources at your disposal. Also, since
transactions arent recorded until the cash is received or paid, the income isnt
taxed until its in the bank.
Accrual Based Accounting
Under the accrual basis, revenues and expenses are recorded when they are
earned, regardless of when the money is actually received or paid. This method is
more commonly used than the cash method. The upside is that the accrual basis
gives a more realistic idea of income and expenses during a period of time,
therefore providing a long-term picture of the business that cash accounting cant
provide. The downside is that accrual accounting doesnt provide any awareness of
cash flow; a business can appear to be very profitable while in reality it has empty
bank accounts. Accrual based accounting without careful monitoring of cash flow
can have potentially devastating consequences.
The Effects of Cash and Accrual Accounting
Understanding the difference between cash and accrual accounting is important,
but its also necessary to put this into context by looking at the direct effects of
each method. Lets look at an example of how cash and accrual accounting affect
the bottom line differently. Consider the following transactions for a month of
business:
1. Sent out an invoice for $5,000 for a web design project completed this month
2. Received a bill for $1,000 in developer fees for work done this month