A Cash Flow Statement provides a detailed summary of the cash inflows and outflows of a business over a specific period. It helps stakeholders assess the company’s liquidity, financial health, and operational efficiency. The statement is typically divided into three sections: Operating Activities, Investing Activities, and Financing Activities. Below is a comprehensive example of how a cash flow statement is prepared using the indirect method.
1. Cash Flow Statement for ABC Ltd (Indirect Method)
| ABC Ltd | |
|---|---|
| Cash Flow Statement for the Year Ended 31 December 2023 | |
| Description | Amount ($) |
| Cash Flows from Operating Activities: | |
| Net Profit Before Tax | 75,000 |
| Adjustments for: | |
| Depreciation | 15,000 |
| Amortization of Intangible Assets | 5,000 |
| Loss on Sale of Equipment | 2,000 |
| Interest Expense | 4,000 |
| Operating Profit Before Working Capital Changes | 101,000 |
| Increase in Accounts Receivable | (8,000) |
| Decrease in Inventory | 6,000 |
| Increase in Accounts Payable | 5,000 |
| Cash Generated from Operations | 104,000 |
| Income Taxes Paid | (12,000) |
| Net Cash from Operating Activities | 92,000 |
| Cash Flows from Investing Activities: | |
| Purchase of Property, Plant, and Equipment | (40,000) |
| Proceeds from Sale of Equipment | 7,000 |
| Purchase of Investments | (10,000) |
| Interest Received | 2,500 |
| Net Cash Used in Investing Activities | (40,500) |
| Cash Flows from Financing Activities: | |
| Proceeds from Issuance of Share Capital | 20,000 |
| Proceeds from Bank Loan | 30,000 |
| Repayment of Bank Loan | (15,000) |
| Dividends Paid | (10,000) |
| Interest Paid | (4,000) |
| Net Cash from Financing Activities | 21,000 |
| Net Increase in Cash and Cash Equivalents | 72,500 |
| Cash and Cash Equivalents at Beginning of Year | 18,000 |
| Cash and Cash Equivalents at End of Year | 90,500 |
2. Explanation of the Cash Flow Statement
A. Operating Activities
The operating activities section starts with the net profit before tax and adjusts for non-cash items such as depreciation, amortization, and changes in working capital. In this example, ABC Ltd generated $92,000 from its core business operations after accounting for tax payments and working capital changes.
B. Investing Activities
This section reflects cash flows from the acquisition and disposal of long-term assets. ABC Ltd spent $40,000 on new equipment but recouped $7,000 from the sale of old equipment. Additionally, the company invested $10,000 in financial instruments, resulting in a net outflow of $40,500 in investing activities.
C. Financing Activities
The financing activities section details how the company raised capital and repaid financial obligations. ABC Ltd issued $20,000 in new shares, secured a $30,000 loan, and repaid $15,000 of its existing debt. Dividends of $10,000 were paid to shareholders, and $4,000 was spent on interest payments. The net result was a positive cash flow of $21,000 from financing activities.
D. Net Increase in Cash
The combined effect of operating, investing, and financing activities resulted in a net increase in cash and cash equivalents of $72,500. The company’s cash balance grew from $18,000 at the beginning of the year to $90,500 at the end of the year.
3. Importance of the Cash Flow Statement
The cash flow statement is a vital financial tool that provides insights into a company’s liquidity and financial health. It complements the income statement and balance sheet by focusing on actual cash movements rather than accounting profits. Key benefits include:
- Liquidity Assessment: Helps assess the company’s ability to meet short-term obligations and manage cash effectively.
- Operational Efficiency: Provides insights into how efficiently a company generates cash from its core business operations.
- Investment and Financing Insights: Reveals how the company is investing in growth and managing its capital structure.
- Stakeholder Confidence: Transparent reporting of cash flows enhances stakeholder trust and aids in financial decision-making.
4. Understanding Cash Flow Statements
A well-prepared Cash Flow Statement offers a comprehensive view of a company’s cash generation and utilization over a given period. By analyzing the inflows and outflows from operating, investing, and financing activities, stakeholders can make informed decisions regarding the company’s financial health, operational efficiency, and future growth potential. This example illustrates how businesses can effectively track and report their cash movements, ensuring transparency and accountability in financial reporting.