Updated July 14, 2023
Definition of Cash Flow Statement
The Cash Flow Statement is one of the Financial Statements that the company issue to portray the company’s financial position. Unlike accrual accounting, the cash flow statement only deals with actual cash inflow and outflow, where entries are recorded when transactions occur rather than actual cash exchange.
Cash flow statements consist of three parts, operating Cash flow, Investing Cash Flow, Financing Cash Flow. The summation of all the three Cash Flows gives the total cash inflow/outflow of the firm. In this topic, we will learn the different examples of cash flow statement.
Explanation
The Cash Flow Statement concentrates on the transactions where cash is involved. Any transaction recorded as per accrual accounting and has affected the firm’s net profit is reversed in the cash flow statements. There are three types of cash flow statements, each dedicated to showing the picture of a particular firm segment. Operating Cash Flow shows the cash inflow/outflow from the firm’s operations. Similarly, investing and financing concentrate on where the company invests cash and how the company generates cash, respectively.
Examples of Cash Flow Statements
Following are the examples are given below:
Example #1
Company XYZ is a steel manufacturing company. There is large machinery that the companies use, and heavy depreciation is charged on them. The company follows accrual accounting and has hired an accountant to find the company’s Operating Cash Flow. Find the below-mentioned details of the company:
- Net Profit for the year: $800,000
- Depreciation for the year: $50,000
- Increase in Accounts Receivable as compared to last year: $10,000
- Increase in Accounts Payable as compared to last year: $5,000
- Decrease in Inventory as compared to last year: $8,000
Calculate the Operating Cash Flow of the firm.
Solution:
Cash Flow from operation considers only the cash Inflow and outflow from the company’s daily operation.
Step 1: Start from the Accounting Net Profit of the Firm. In the above question, the firm’s Net Profit is $800,000.
Step 2: Adjust Non-Cash Expenses already deducted from the Accounting Net Profit. So depreciation of $50,000 should be added back with the Net Profit of $800,000.
Step 3: Adjust the changes in Current Assets. When the current asset increases, cash is used to buy current assets. So cash flow should decrease and vice versa.
Deduct, Increase in Accounts Receivable – $10,000
Add, Decrease in inventory – $8.000
Net effect – (-$2,000)
Step 4: Adjust the changes in Current Liability. When current liability increases, it means that cash is received. So cash flow should increase and vice versa.
Add, Increase in Accounts Payable – $5,000
Step 5: Calculate the Net Cash Inflow/Outflow from operations.
Net Income: $800,000
Add depreciation: $50,000
Less, Increase in Accounts Receivable: ($10,000)
Add, Decrease in inventory: $8,000
Add, Increase in Accounts Payable: $5,000
Balance: 853,000
The net cash inflow from operating cash flow is $853,000.
| Operating Cash Flow | |
| Particulars | Amount |
| Net Income | 8,00,000 |
| Add, Depreciation | 50,000 |
| Less Increase in Accounts Receivable | -10,000 |
| Add, Decrease in Inventory | 8,000 |
| Add, Increase in Accounts Payable | 5,000 |
| Cash Flow from Operations | 8,53,000 |
Example #2
Company MTS is an oil refinery company and plans to purchase a few modern machines and replace the old ones. The list of the machines being purchased and sold is mentioned below:
Bought
3 new rock drilling machines: $500,000
4 Trucks: $50,000
New Steel Pipes: $400,000
Sold
4 old refinery units: $200,000
Calculate the cash from Investing Activities.
Solution:
Cash is spent whenever a company buys new machinery, so cash moves out from Cash Flow from investing decreases.
Deduct 3 new rock drilling machines: ($500,000)
Deduct, 4 Trucks: ($50,000)
Deduct, New Steel Pipes: ($400,000)
Add 4 old refinery units: $200,000
Net Cash Flow from Investing is $-750,000. This is a cash outflow. The company has experienced a cash outflow of $750,000 from its investing activities.
| Investing Cash Flow | |
| Particulars | Amount |
| Less 3 new rock drilling machines | -5,00,000 |
| Less 4 Trucks | -50,000 |
| Less New Steel Pipes | -4,00,000 |
| Add 4 Old refinery units | 2,00,000 |
| Cash Flow from Investing | -7,50,000 |
Example #3
Calculate the Cash flow from Investing Activity for Company ABC. The details of financing activities are mentioned below.
Issue of Equity Shares: $500,000
Buyback of Equity shares: $200,000
Issue of bonds: $100,000
Issue of Preferred shares: $300,000
Repayment of Bonds: $150,000
Calculate the cash flow from financing activity.
Solution:
The issue of capital is an inflow of cash as money gets into the business; any repayment is an outflow of cash as money flows out of the business.
Add, Issue of Equity Shares: $500,000
Less, Buyback of Equity shares: ($200,000)
Add, Issue of bonds: $100,000
Add, Issue of preferred shares: $300,000
Less, Repayment of loan: ($150,000)
Net cash flow from financing activity is $550,000
There is net cash inflow from the financing activity, meaning that money has come into the business through capital issuance.
| Financing Cash Flow | |
| Particulars | Amount |
| Add, Issue of Equity Shares | 5,00,000 |
| Less, Buyback of Equity shares | -2,00,000 |
| Add, Issue of bonds | 1,00,000 |
| Add, Issue of preferred shares | 3,00,000 |
| Less, Repayment of loans | -1,50,000 |
| Cash Flow from Financing Activity | 5,50,000 |
Conclusion
Cash Flow is one of the most important financial statements referred to by stakeholders, auditors, analysts, and other persons related to the company. Cash flow gives us the financial position of the company. It reflects the true picture in terms of cash deals. At times, sales are made on credit, which inflates the firm’s net profit. So if an analyst is suspicious of the increased net profit, he can tally it with the cash flow statement. If cash flow is not showing any jump, then most of the sales are made on credit, and there is a risk regarding the recovery. Cash flow is an important statement that auditors, analysts, and other parties use to check the sustainability of the net profit.
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