Statement of cash flows

The statement of cash flows is one of the financial statements of accounting,  reports on the origin and use of cash flows and their equivalents.

Cash flows are presented in cascade format and the information presented refers to the year of the formulation and the previous one. It also includes a column for possible cross-notes with memory.

The information contained in the statement of cash flows reflects all collections and payments made by the company in that year. This is intended to provide extensive information on the origin of the cash (collections) and the use of that cash (payments) throughout the year.

The cash flows are inflows and outflows of cash in accounts Cash and liquid equivalents. Cash is considered to be cash deposited in the cash register and demand bank deposits . Financial instruments that can be converted into cash can also be considered as effective provided they meet these three requirements:

  • Its expiration at the time of acquisition does not exceed three months,
  • There is no significant risk of variation in its value,
  • They are considered part of the usual treasury management.

Internal cash flows or acquisition payments, amortization charges or financial assets that have been considered as equivalent liquid assets are not included in the cash flow statement.

Methods to calculate the statement of cash flows

For the formulation of the statement of cash flows, the direct and indirect method is used:

  • The direct method:It is formulated by ordering collections and payments based on the main categories to which they belong. With this method the quantities derived from the different categories are presented by their gross amount.
  • The indirect method:It is formulated based on the utility thrown by the income statement and then debug it with conciliatory items until reaching the effective balance in books. This method is more complex in practice and less used since some of the conciliatory items do not represent real cash movements although they somehow affect the ability of the company to make payments.

Classification of cash movements by direct method

The classification of cash movements is based on three monetary flows.

  • Cash flows from operating activities:are the cash flows (collections and payments) derived from the main activity of the company with which it generates income and expenses .
  • Cash flows from investment activities:are payments derived from the acquisition of non-current assets (intangible assets, materials, real estate investments …) as well as charges derived from disposal, amortization or maturity.
  • Cash flows from financing activities:These are collections from the acquisition by third parties of securities issued by the company or from resources granted by financial entities, as well as payments made for the amortization or return of the same. Payments to shareholders in the form of dividends also fall into this category.

Objectives of the Cash Flow Statement

The knowledge of the cash flows allows to offer very valuable information of the company:

  • It provides very useful information to the administrators of the company, in order to measure their accounting policies and anticipate possible problems.
  • It allows to improve the financing and investment policies.
  • It helps to know what the company has spent the available cash to control its decapitalization.
  • Lets predict future flows.
  • Ability to pay interest and dividends, as well as your debts.
  • Identify changes in productive cycles

The objective of controlling cash is to take care of all the money that goes in to be able to program the money that goes out. A company can invest its cash in liquid assets such as money market assets,  treasury bills ,  repos , excess cash and will be accounted for as cash and equivalents. Therefore, a rigorous treasury control will facilitate the success of the company.

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