The information obtained from the financial statements is too important for organizations, the statement of cash flows helps in planning and generating budgets, without leaving aside the measurement that can be done to meet the commitments made.
The statement of cash flows is included in the basic financial statements that companies must prepare to comply with the laws and institutional regulations of each country. This provides important information for business managers and arises in response to the need to determine the outflow of resources at a given time, as well as a projective analysis to support decision-making in financial, operational, administrative and commercial activities.
This article is based on the information contained in the pronouncement number eight of the technical council of the public accounting of Colombia, but it is applicable to other countries since it is subject to the provisions and pronouncements issued by the financial accounting standards board (FASB).
Statement of cash flows
Definition:
The statement of cash flows is the basic financial statement that shows the cash generated and used in operating, investing and financing activities. The change of the different items of the Balance Sheet that affect the cash must be determined for its implementation.
General objective:
The objective of this statement is to present pertinent and concise information regarding the cash collections and disbursements of an economic entity during a period so that the users of the financial statements have additional elements to examine the entity's ability to generate future flows of Cash, to assess the ability to meet its obligations, determine internal and external financing, analyze changes in cash, and establish the differences between net income and collections and disbursements.
Forward: The analysis of the cash flow statement must clearly reflect the economic environment, the demand for information, the generation of resources and the solvency of the agents.
To meet the general objective, the variation that the cash has had during the period must be clearly shown compared to the activities of:
- Operation: Those that affect the results of the company, are related to the production and generation of goods and the provision of services. Cash flows are generally a consequence of cash transactions and other events that go into determining net profit. Investment: They include the granting and collection of loans, the acquisition and sale of investments and all operations considered as non-operational. Financing: determined by obtaining resources from the owners and the reimbursement of returns. All changes in liabilities and equity other than operating items are considered.
The effects of investment and financing activities that change or modify the financial situation of the company, but that do not affect the cash flows during the period must be disclosed at the time. Additionally, a reconciliation between net income and cash flow must be presented.
Cash flows from operations
Tickets:
- Collection of sales for goods or provision of services. Collection of accounts receivable. Collection of interest and investment income. Other collections not originated from investment or financing operations.
Departures:
- Cash disbursement for the acquisition of raw materials, supplies and goods for production.Payment of short-term accounts.Payment to creditors and employees.Payment of interest to lenders.Other non-originated payments with investment or financing operations.
To provide an overview of changes in cash or cash equivalents, the statement of cash flows must show variations in all activities of the economic entity.
Extracting: The statement of cash flows refers to the activities of: Operation Investment Financing.
Investment cash flows
Tickets:
- Collection for the sale of investments, property, plant and equipment and other fixed assets. Short or long-term loan collections, granted by the entity. Other collections related to investment or financing operations.
Departures:
- Payments to acquire investments, property, plant and equipment and other fixed assets. Payments in the granting of short and long-term loans. Other payments not originated with investment or financing operations.
Financing cash flows
Tickets:
- Cash received for increases in contributions or relocation of contributions. Short and long-term loans received, other than transactions with suppliers and creditors related to the operation of the entity. Other cash inflows not related to operating and investment activities.
Departures:
- Payments of dividends or their equivalent, depending on the nature of the economic entity. Reimbursement of contributions in cash. Re-acquisition of contributions in cash. Payments of short and long-term obligations different from those originated in operating activities. Other payments not related to activities of operation and investment.
Presentation forms
There are two ways or methods to present operating activities in the statement of cash flows:
Direct method:
In this method, the activities are presented as if it were an income statement by the cash system. Companies using this method must report movements related to:
- Cash collected from customers Cash received from interest, dividends and other investment returns Other operating charges Cash paid to employees and suppliers Cash paid from interest Tax payments Other operating payments
Indirect method:
Under this method, a reconciliation between net income and net cash flow from operating activities is prepared, which must be reported separately for all reconciling items.
The use of this method, leads to the use of the cash flow generated by normal operations, is determined taking as a starting point the net profit for the period, value to which the items included in the income statement that are not added or deducted involve a cash collection or payment. Among the items mentioned are:
- Depreciation, amortization and depletion Provisions for asset protection Differences due to exchange rate fluctuations Profits or losses on sale of property, plant and equipment, investments or other operating assets Monetary correction of the balance sheet accounts Change in operating items such as: increase or decreases in accounts receivable, inventories, accounts payable, estimated liabilities and provisions.
When this method is used, reconciliation can be made with respect to operating profit.
The following is a practical example of the theory outlined in the Cash Flow Statement article. The company has the following information expressed in the financial statements.
| COMPANY ABC BALANCE SHEET 31-12-X1 | ||
| ASSETS | ………… | |
| Stream | ||
| Cash | $ 1,800 | |
| Accounts receivable | $ 10,200 | |
| Inventory | $ 17,000 | |
| Inversions in actions | $ 6,000 | |
| Total current assets | $ 35,000 | |
| Not current | ||
| Property, plant and equipment | ||
| Ground | $ 100,000 | |
| Building | $ 98,000 | |
| Furniture | $ 56,000 | |
| Vehicles | $ 85,000 | |
| Accumulated depreciation | $ -60,000 | |
| Total | $ 279,000 | |
| Valuations | $ 286,000 | |
| Total assets | $ 600,000 | |
| PASSIVES | ||
| Stream | ||
| Debts to pay | $ 15,000 | |
| Laboral obligations | $ 5,000 | |
| Taxes | $ 1,500 | |
| Bank obligations | $ 8,500 | |
| Total current liabilities | $ 30,000 | |
| Long-term liabilities | ||
| Laboral obligations | $ 28,000 | |
| Long-term obligations | $ 150,000 | |
| Total long-term liabilities | $ 178,000 | |
| Total liabilities | $ 208,000 | |
| HERITAGE | ||
| Subscribed capital | $ 40,000 | |
| Bookings | $ 21,000 | |
| Equity appreciation | $ 30,000 | |
| Profits for the period | $ 15,000 | |
| Surplus | $ 286,000 | |
| Total assets | $ 392,000 | |
| Total liabilities + equity | $ 600,000 |
Additional Information:
- $ 50,000 was obtained for long-term obligations and $ 60,000 for the issue of shares. Profits were applied as follows: 60% for dividends and 40% for reserves. A vehicle was purchased for $ 60,000 and furniture for $ 40,000, it was paid for the same $$ 30,000 in Cash and the rest were long-term financed. Additional investments were purchased in cash for $ 12,000. Investments were sold in cash for $ 4,000 (adjusted cost $ 2,800)
| ABC COMPANY | ||
| STATEMENT OF INCOME | ||
| JANUARY / DECEMBER 19X2 | ||
| Sales | $ 360,000 | |
| Inflation adjustment | $ 40,000 | |
| Adjusted sales | $ 400,000 | |
| Merchandise cost | $ 170,000 | |
| Inflation adjustment | $ 25,000 | $ 195,000 |
| Gross profit | $ 205,000 | |
| General expenses | ||
| Labor | $ 70,000 | |
| Sales and administration | $ 40,000 | |
| Depreciation | $ 22,500 | |
| Inflation adjustment | $ 15,500 | $ 148,000 |
| Operational utility | $ 57,000 | |
| Other income / expenses | ||
| Investment sales profit | $ 1,200 | |
| Investment returns | $ 1,800 | |
| Inflation adjustment | $ 300 | |
| Financial expenses | $ -25,000 | |
| Inflation adjustment | $ -4,000 | $ -25,700 |
| Earnings before correction m | $ 31,300 | |
| Monetary correction | $ 47,000 | |
| Income before taxes | $ 78,300 | |
| Tax provision | $ -23,300 | |
| Period utility | $ 55,000 |
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| ABC COMPANY | ||
| BALANCE SHEET | ||
| 31-12-X2 | ||
| ……………. | ||
| ASSETS | ||
| Stream | ||
| Cash | $ 38,700 | |
| Accounts receivable | $ 12,000 | |
| Inventory | $ 20,000 | |
| Inversions in actions | $ 16,800 | |
| Total current assets | $ 87,500 | |
| Not current | ||
| Property, plant and equipment | ||
| Ground | $ 120,000 | |
| Building | $ 117,000 | |
| Furniture | $ 106,000 | |
| Vehicles | $ 161,000 | |
| Accumulated depreciation | $ -94,500 | |
| Total | $ 409,500 | |
| Valuations | $ 320,000 | |
| Total assets | $ 817,000 | |
| PASSIVES | ||
| Stream | ||
| Debts to pay | $ 20,000 | |
| Laboral obligations | $ 8,000 | |
| Taxes | $ 18,000 | |
| Bank obligations | $ 2,000 | |
| Total current liabilities | $ 48,000 | |
| Long-term liabilities | ||
| Laboral obligations | $ 30,000 | |
| Long-term obligations | $ 190,000 | |
| Total long-term liabilities | $ 220,000 | |
| Total liabilities | $ 268,000 | |
| HERITAGE | ||
| Subscribed capital | $ 100,000 | |
| Bookings | $ 27,000 | |
| Equity appreciation | $ 47,000 | |
| Profits for the period | $ 55,000 | |
| Surplus | $ 320,000 | |
| Total assets | $ 549,000 | |
| Total liabilities + equity | $ 817,000 |
The objective of this statement is to present pertinent and concise information regarding the cash collections and disbursements of an economic entity during a period.
Calculations:
- Cash: This item includes money in cash and banks and all investments in fixed amounts with a term not exceeding three months.
| 12/31 / X1 |
12/31 / X2 |
|
| Cash and banks |
5000 |
1500 |
| Short-term investments |
33700 |
300 |
| Cash |
38700 |
1800 |
- Monetary correction: Of the total adjustment for inflation in inventories for the period $ 30,200, the inventory balance in 12/31 / X2 contains $ 5,200 and the difference of $ 25,000 was carried at the cost of merchandise sold. Property, plant and equipment: During the period the following were acquired
Vehicle $ 60,000
Furniture $ 40,000
$ 30,000 was paid in cash and the rest was financed with a 36-month obligation.
- Monetary correction during 12/31 / X2: The following movement occurred in the period.
| PP fit and equipment | $ 65,000 |
| Inventory adjustment | $ 5,200 |
| Investment adjustment | $ 1,600 |
| Equity adjustment | $ 17,000 |
| Accumulated depreciation adjustment | $ 12,000 |
| Balance sheet adjustment | $ 42,800 |
| Adjust result accounts | $ 4,200 |
| Income from exposure to inflation | $ 47,000 |
With the previous data, the fundamentals are applied and are carried out by the two methods exposed in the theoretical article.
|
ABC COMPANY |
||
|
STATEMENT OF CASH FLOWS |
||
|
JANUARY / DECEMBER 19X2 |
||
|
DIRECT METHOD |
||
| Operation activities | ||
| Customer collection | $ 358,200 | |
| Payments to employees | $ -65,000 | |
| Payments to suppliers | $ 162,800 | |
| Payments and other sales and administration expenses | $ -40,000 | |
| Cash generated in operation | $ 90,400 | |
| Financial expense payments | $ -25,000 | |
| Tax payments | $ -6,800 | |
| Investment yield | $ 1,800 | |
| Net cash flow from operations | $ 60,400 | |
| Investment activities | ||
| Buy PPy equipment | $ -30,000 | |
| Investment purchase | $ -12,000 | |
| Investment sale | $ 4,000 | |
| Net cash flow in investment | $ -38,000 | |
| Financing activities | ||
| Issuance of shares | $ 60,000 | |
| New long-term obligations | $ 50,000 | |
| Payment of long-term obligations | $ -80,000 | |
| Payment of bank obligations | $ 6,500 | |
| Dividend payment | $ 9,000 | |
| Net cash flow in financing | $ 14,500 | |
| Increase in cash | $ 36,900 | |
| Cash 12/31 / X1 | $ 1,800 | |
| Cash 12/31 / X2 | $ 38,700 |
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|
ABC COMPANY |
||
|
STATEMENT OF CASH FLOWS |
||
|
JANUARY / DECEMBER 19X2 |
||
|
INDIRECT METHOD |
||
| Operation activities | ||
| Period utility | $ 55,000 | |
| Items that do not affect cash | ||
| Depreciation | $ 22,500 | |
| Inflation adjustments | $ -42,000 | |
| Investment sales profit | $ -1,200 | $ 21,500 |
| Cash generated in operation | $ 33,500 | |
| Change in operational items | ||
| (-) Increase accounts receivable | $ 1,800 | |
| (+) Decrease in inventories | $ 2,200 | |
| (+) Increase accounts payable | $ 5,000 | |
| (+) Increase in oblig. Labor | $ 5,000 | |
| (+) Increase in taxes | $ 16,500 | $ 26,900 |
| Net effective cash flow from activities | $ 60,400 | |
| Investment activities | ||
| Buy PP and equipment | $ -30,000 | |
| Investment purchase | $ -12,000 | |
| Investment sales | $ 4,000 | |
| Net cash flow in investment | $ 38,000 | |
| Financing activities | ||
| Issuance of shares | $ 60,000 | |
| New long-term obligations | $ 50,000 | |
| Payment of long-term obligations | $ -80,000 | |
| Payment of bank obligations | $ -6,500 | |
| Dividend payment | $ -9,000 | |
| Net cash flow in financing | $ 14,500 | |
| Effective increase | $ 36,900 | |
| Cash 12/31 / X1 | $ 1,800 | |
| Cash 12/31 / X2 | $ 38,700 |
The analysis is focused on the fact that the information produced by any of the methods is the same, and the decisions made by the financial manager depend on it.
In the following video-lesson (2 videos, 29 minutes), from the Technical Private University of Loja, a theoretical and practical approach to the Cash Flow Statement is made.
