The cashflow statement is another important financial statement which looks at the money
coming in and going out of a business.
I’m Thomas Harwood and Welcome to The Accounting Student, where we create free and short videos
so that you can learn about accounting.
Today’s video is looking at the cashflow statement.
As mentioned in the video on the balance sheet, the balance sheet shows a business’s financial
position at a particular date and typically is prepared once a year.
Although the balance sheet provides a cash value at a certain date, it does not show
how the business has used the cash and bank reserves during the period.
The cashflow statement uses the information from the accounting records such as the income
statement and balance sheet and shows the money flowing in and out of a business.
In simpler terms, it shows where the cash has come from and where the cash has gone
to.
Furthermore, the cashflow statement explains the reasons for the changes in the cash and
bank balances between the periods.
And focuses on the liquidity of the business and clarifies in some cases why the cash and
bank balances may have fallen despite profits being earned.
It is important to note that profit is not the same as cash flow and sometimes when good
profits are made a business can still experience cash flow difficulties. Similarly, a business
can be reasonably liquid despite making only small profits.
This can be caused due to a variety of factors. A few of these factors are large drawings
being taken, large values of equipment being purchased, or generous credit terms given
to debtors.
The cashflow statement is very important such to an extent that the accounting standards
require all but small businesses to include the cashflow statement alongside the income
statement and balance sheet.
Let’s have a look at the layout of the cashflow statement by looking at an example.
At the top we have the title as The Cashflow Statement for ABC Ltd for y/e 31/12/2017
The cashflow statements are divided into the following sections:
The first section is the net cash flows from operating activities.
As you can probably tell from the title, this is the amount of cash flow generated from
the trading or operating activities of the business.
The second section is the net cash flow from investing activities.
This section of the cash flow statement shows the cash flows relating to the interest received
and interest paid.
The third section is the taxation.
The taxation section shows the taxation amount paid during the year, otherwise identified
as the tax that was owing at the end of the previous year.
Capital Expenditure.
This section shows the cash flows relating to the purchases and sales of fixed assets.
For example, this maybe the purchase or sale of tangible fixed assets or purchase or sale
of investments.
Equity Dividends.
The next section looks at the payment of dividends. The dividends paid will be any interim dividends
paid during the year plus any other dividends owing from the previous year.
The final section is the financing section which shows the cash flows in respect of shares,
loans and bonds. Cash inflows can be due to an increase in share capital from issuing
extra shares or an increase in medium and long-term loans.
Cash outflows can be caused from the repayment or redemption of share capital or by a repayment
of medium and long-term loans.
The subtotals from these main sections are totalled to give the increase or decrease
in cash and bank reserves for the year. This number should then reconcile to the cash and
bank amount stated on the balance sheet.
So that was the explanation of the cashflow statement. If you enjoyed it, press the like
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