The company’s cash movement in one period is very important to report in order to know the performance of operational activities. The container used to report the movement of the company’s funds in one period is called cash flow.
The cash flow statement has its own procedure in its preparation so that information can be conveyed by stakeholders in a systematic manner. The role of the cash flow statement is important as one of the decision-making instruments in the future. The following is a full review of the cash flow statement.
Understanding Cash Flow Statement
The cash flow statement is a place to record the movement of cash, whether cash in or out of the company, at a certain period. Cash flow is a report that will describe how the company’s ability to generate income and pay obligations.
Broadly speaking, the contents of the cash flow statement are informational data regarding cash receipts and disbursements. The function of cash for the company is nothing but a source of funds to carry out operational activities.
In general, cash in the company is divided into 2 types, namely, petty cash and cash in banks. The cash flow statement will specifically contain the movement of all the company’s cash funds.
Furthermore, in cash flow, there are some basic elements that must be included. These elements will be explained in the following points.
Cash Flow Element
There are three basic elements contained in the statement of cash flows, namely operating, investing, and financing activities. These three activities are related to the company’s main operational activities to generate profits which of course have an impact on cash movements.
The first type of cash flow element is operating activities related to the payment of company obligations and receivables. The company’s obligations that must be paid using cash flows include operating expenses and payment of employee salaries.
Investment activities in the report describe cash receipts due to the company’s product sales process. In addition, there are also activities that cause a decrease in cash, but increase other assets. One example is buying a new machine.
The last element in the statement of cash flows is investing activities that relate to long-term investments. There are also funding activities marked by an increase in cash and long-term liabilities, one of which is borrowing capital from banks.
Cash Flow Goals
The preparation of flows as one part of the company’s financial statements is of course based on a specific purpose. Cash flow will help to know the condition of the company, from cash receipts and disbursements activities to operational activities.
The purpose of preparing a statement of cash flows is to serve as a basis for forecasting the future. This will relate to the decision-making that will be made by the company, based on the cash flow statement for the period.
The next thing that underlies the preparation of cash flow statements is to analyze the company’s ability to pay off its obligations. Cash is a form of asset that moves the most smoothly, so it needs to be reported so that it can be allocated properly.
The cash flow statement also has a relationship with the net income generated by the company in one period. Cash flow is useful for evaluating how the movement of the most current assets and its effect on net income received by the company.
The company can also determine the follow-up of long-term investment activities that will be carried out in the next period. The purpose of this report is to describe the company’s cash position in a simpler way, so that it is easy to understand.
Cash flow statement
Many things will be known by the company from preparing a cash flow statement in a certain period. The company will know how its financial structure is, both regarding liquidity and solvency in one period.
The company’s decision making in the future can also be analyzed in the cash flow statement. The amount of cash remaining in the period will affect the ability to carry out operating activities in the future.
In the process of preparing a cash flow statement requires a balance sheet in the previous period and the latest income statement. The company can also check the correctness of the preparation of the cash flow statement through the journal for the period concerned.
The company, of course, will not be able to develop its operational activities properly, without using cash. This asset is considered the most liquid because it is easy to liquidate to meet the company’s operational needs.
The parties who will take advantage of the cash flow statement are not only the company’s internal management, but also creditors, investors, and other parties. This will have an impact on the possibility of the company to increase profits in the next period.
Example of a Cash Flow Statement
|Cash in Hand (beginning of the month)||55.000||67.593||54.265||55.739||69.290||65.618|
|Cash Available (on hand + receipt, before cash out)||67.593||76.065||83.301||91.032||89.662||76.200|
|Cash Position (end of month)||67.593||54.265||55.739||69.290||65.618||51.413|
|Billing from Accounts Receivable Cash||4.498||3.493||1.987||1.029||2.911||4.234|
|Total Cash Receipts||12.593||8.472||29.036||35.293||20.372||10.582|
In the picture above there is an example for a cash flow statement. The template can be downloaded directly on Microsoft, please visit the following page => 12 month cash flow report
Cash Flow Statement Benefits
There are many benefits for internal and external parties of the company from this cash flow statement. The benefit of the first cash flow statement is that it helps provide information regarding the company’s ability to generate current assets in the next period.
External parties can also find out how much the company’s ability to pay dividends on the investment invested. The movement of cash flows in the report helps creditors to determine the company’s ability to settle its obligations.
The level of success of the company in one period can be measured systematically by using the cash flow statement. The entry and exit of these cash funds will help the company to find out the net profit obtained.
Cash Flow Classification
Classification of cash flow statements based on the flow consists of two kinds, namely cash inflows and outflows. Cash inflows are related to company transactions that generate income for the company.
Cash inflow transactions are related to cash receipts in the form of sales of production results. There are also other activities related to investment that generate profits. Cash inflow is also included in the company’s income due to the disposal of the company’s fixed assets.
The next cash flow is cash outflow which results in the expenditure of company funds. This form of expenditure can be used to finance operational activities as well as those related to the settlement of the company’s long-term obligations.
One example of cash flow expenditure to finance operational activities is the purchase of raw materials and payment of production costs. While the form of expenditure to pay long-term obligations is the payment of dividends.
Cash Flow Preparation Method
There are 2 methods used to prepare cash flow statements, namely direct and indirect. The two methods have fundamental differences in their preparation, especially in their components.
The cash flow statements through the two preparation methods have the same function, but the systematics are different. The following is a review of the two methods of preparing cash flow statements, both direct and indirect.
1. Direct Method
The cash flow statement is prepared using the direct method based on journals relating to cash and bank statements. This method uses information related to the company’s operating activities in its preparation.
The company’s receipts and expenses will be grouped based on operating activities. In the next section, cash receipts and disbursements from investing and financing activities will be recorded.
The cash flow statement using the direct method takes a little longer to detail the three elements of its activities. However, the results of the direct method cash flow statement can still be accounted for for its accuracy.
2. Indirect Method
The indirect method cash flow statement is prepared with three complete elements. The source of data from the indirect method of cash flow statements is the income statement for the period concerned. The income statement is used to determine the company’s net income.