Cash Flow Statement

The cash flow statement is one of the three basic reports of financial statements. It reflects the increase or decrease in a company's cash (including bank deposits) during a certain period of time (usually monthly or quarterly). The appearance of the cash flow statement is mainly to reflect the impact of each item in the balance sheet on cash flow, and is divided into three activity categories: operating, investing and financing according to its purpose. The cash flow statement can be used to analyze whether a company has enough cash to meet expenses in the short term. IFRS Bulletin No. 7 regulates the preparation of cash flow statements.

The meaning and function of cash flow statement

As an analytical tool, the main function of the cash flow statement is to determine the short-term viability of the company, especially the ability to pay its bills. It is a statement that reflects the dynamic status of cash inflows and cash outflows of an enterprise within a certain period of time. Its composition is consistent with the balance sheet and income statement. The cash flow statement can summarize the impact of operating activities, investment activities and financing activities on the cash inflow and outflow of the enterprise. It provides a better basis for evaluating the enterprise's realized profits, financial status and financial management than the traditional profit and loss statement.

The cash flow statement provides evidence of the health of a company's operations. If a company's cash flow from operating activities is insufficient to pay dividends and maintain the productive capacity of its equity, and it must borrow money to meet these needs, then this is a warning that the company cannot maintain normal conditions in the long term. the following expenditures. The cash flow statement reveals a company's inherent development problems by showing a shortfall in cash generated from operations and having to borrow money to pay dividends at a level that cannot be sustained permanently.

A normally operating enterprise should not only create profits but also generate cash income. By analyzing the sources of cash inflows, the ability to create cash can be evaluated and the enterprise's ability to obtain cash in the future can be predicted. The cash flow information revealed by the cash flow statement can make a more reliable and robust evaluation of the company's solvency and payment ability from a cash perspective.

A company's net profit is calculated on an accrual basis, while the cash flows in the cash flow statement are calculated on a cash basis. Through comparative analysis of cash flow and net profit, the quality of earnings can be evaluated.

Investment activities are an act in which an enterprise invests part of its financial resources in a certain object in order to obtain more profits. Financing activities are an act in which an enterprise conducts direct or indirect financing according to its financial needs. The investment and financing activities of an enterprise are closely related to the enterprise's Operating activities are closely related. Therefore, the cash inflow and cash outflow information generated by investing activities and financing activities revealed in the cash flow can be combined with the cash flow information generated by operating activities and the company's net income to conduct a specific analysis, thereby making a detailed analysis of the company's net income. investment activities and financing activities.

Limitations and reasons of cash flow statement

Although the cash flow statement has many advantages and functions, it cannot be ignored that it has some limitations. The main points are as follows:

Realistic limitations: Due to the existence of non-sight payment methods such as credit transactions and bill transactions in the market, many transactions do not immediately produce actual receipts and payments. Therefore, looking at a business purely from a cash perspective may ignore these possible future changes or risks.

Reasons for limitations: Due to factors such as different industries, different scales, different stages, and different regions, there are differences and comparability issues in various indicators between companies. Therefore, when using the cash flow statement, attention should be paid to selecting appropriate reference objects and indicators.

The cash flow statement cannot reflect non-monetary transactions: for example, transactions or investment activities in the form of barter, share exchange, etc. do not involve actual receipts and payments in accounting, and will only be disclosed in the form of notes in the financial report.

The cash flow statement cannot reflect future development trends: Since many investment or financing decisions are made based on expected future benefits or costs, they may have negative effects or insignificant effects in the current period. Therefore, when using the cash flow statement, attention should be paid to distinguishing between long-term and short-term effects.

The cash flow statement cannot reflect changes in market value: Because there are many factors that affect value changes in the market (such as supply and demand relationships, policy changes, competition, etc.), some assets or liabilities may be higher or lower than their book value in the market. (cost) value.

Preparation of cash flow statement

The principle of preparing the cash flow statement is based on the cash basis, that is, only when actual changes in cash or cash equivalents occur, they are recorded in the cash flow statement. The preparation procedure of the cash flow statement is to first determine the opening and closing balances of cash and cash equivalents during the reporting period, then classify and record cash inflows and cash outflows according to operating activities, investing activities and financing activities, and finally calculate the net cash of each activity. Traffic and net increase (decrease) for the entire reporting period.

The preparation of the cash flow statement mainly includes the following four parts:

The main statement of the cash flow statement: reflects the amount of cash inflows and cash outflows generated by various activities of the enterprise during the reporting period, as well as the net cash flow of various activities and the net increase (decrease) during the entire reporting period.

Notes to the cash flow statement: Supplementary explanation or analysis of certain items or amounts in the main statement, such as the composition of cash equivalents, non-monetary transactions, major investments and financing activities, etc.

Cash flow statement schedule: provides other information related to the main statement, such as a schedule that adjusts the difference between profits and cash flows from operating activities, a schedule that adjusts the differences between liabilities, owners' equity and non-cash assets, etc. .

Signature of the cash flow statement: signed by the legal representative of the enterprise, the person in charge of accounting work and the person in charge of the accounting department, indicating that he is responsible for the authenticity and completeness of the cash flow statement.

There are two methods for preparing cash flow statements: direct method and indirect method. The direct method is to extract the amounts of various receipts and payments directly from the original account books or other data, and summarize them according to activity classification; the indirect method is based on the net profit or net loss in the income statement, by adjusting non-cash income and expenditure items, The cash flow generated from operating activities is calculated by using items that are inconsistent with the timing of profits and income or expenses, income and expenditure items related to investment and financing, etc., while investment activities and financing activities are the same as the direct method. The net cash flow of each activity and the net increase (decrease) for the entire reporting period obtained by the two methods are the same, but they are presented in different ways. Generally speaking, the direct method can more clearly reflect the specific receipts and payments generated by various activities of the company, but it is also more difficult to compile; the indirect method can better highlight the relationship between corporate profits and cash flow, but it is also easier to cover up some Important information.