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Cash Flow | Importance of Cash Flow Statement with Example

Cash Flow | Importance of Cash Flow Statement with Example

What is Cash Flow?

cash flow refers to the movement of cash into or out of an account of business or investment when cash inflows exceed outflows this is generally considered to be a sign of good financial health both for individuals and companies.

The ad makes his living running its carpets bread cash flow is essential to the survival of his business as well as his personal finances.

Having Arkell cash on hand ensures that yet can pay his employees his creditors and himself on time keeping the business afloat the same goes for Edie he needs enough cash in his personal bank account to pay for his house his car and other personal expenses whether we are talking about Edie or his business.

There are generally three types of cash flows.

  • one operational cash flows: refer to cash received or spent as a result of a company's business activities for example a business Ed's carpets bring some cash by summing carpets and cents clams out to pay employees and suppliers similarly, ed pays himself a salary providing cash flow to his personal account Marsh will blow out to pay for his expenses such as food and housing.
  • investment cash flows refer to cash: received or spent through investing activities basically the purchasing and selling of assets that will help grow the business or in the case of end assets that will help increase his net worth.
  • financing cash flows: refer to cash received through debt or paid out as debt repayments for a company issuing stock paying on dead and repurchasing shares would count as part of the financing cash flows red financing cash flows.

Cash Flows Explained

cash flows (found on the cash flow statement) rather than their reported earnings numbers... but what exactly are cash flows, and why are they given more weighting?

it's why many investors prefer to look at a company's cash flow statement when analyzing performance you see a company's ability to generate cash is an important factor to consider when researching an investment idea and looking at a firm's cash flows can clear whether a business is actually making money or if they're simply abusing accounting rules to inflate their earnings number.

so let's go over cash flow statements and why cash is king on today's plane dangle.

A cash flow simply refers to cash that a company has paid out or received in other words it's any revenue gain expense or pays the company has actually realized that has actually impacted their bank account in a perfect world one would expect that cash flows would be identical to the revenue expenses listed on the income statement but this is rarely the case gains and losses on the income statement can be non-cash in sometimes a business may accrue expenses or revenues for which cash has yet to change hands.

Cash Flow Statement Basics Explained

The Cash Flow Statement is one of the 3 main Financial Statements. It will show you how effective a business is in managing its cash.  

Most companies apply Accrual Accounting and it's important to understand that under this method revenue does not always equal cash in, and incurred expenses do not equal cash out. Therefore, don't make the mistake of just looking at the income statement and the balance sheet. 

Focus on the Cash Flow Statement as well because it will show you where the company makes and spends its money. 

The Cash Flow Statement consists of 3 main parts:

1). Cash Flow from Operations

Here we can find out how much cash a business is able to generate by selling its products and services. To calculate the Cash Flow from Operations there are 2 methods in use. In this video, we will focus on the indirect method because it's used by most companies. 

It's linked to the income statement and starts with the Net Income. But in Accrual Accounting revenue does not equal cash in, and expenses do not equal cash out. Therefore, the net income from the Income statement must be adjusted to see the actual cash flows. 

The most common adjustments are for non-cash transactions (depreciation, amortization, gains/losses for sales of non-current assets), and for working capital. 

2). Cash Flow from Investing Activities

This shows the cash spent on investments or cash received from sales of investments. Here we can see the full cash inflow or outflow when a company purchases or sells the property, equipment, or other investments. We can also find out if the business acquired a company to expand its activities.

3). Cash Flow from Financing Activities

This section summarizes cash transactions that involve raising, borrowing, and repaying capital. When a company gets a bank loan or issues new shares it will receive additional cash. Therefore, this cash inflow will be reported with a positive figure. 

On the other hand, if the company repays the principal portion of a loan, pays dividends to its owners, or purchases its own shares it spends cash and reduces the cash balance. Therefore, this cash outflow will be reported with a negative figure. 

At the very bottom of the Cash Flow Statement, you will find the reconciliation to the cash balance in the Balance Sheet. The cash ending balance from the last period, plus the Cash Flows from Operations, Investing and Financing Activities must equal the cash ending balance for the current period. Sometimes, you will find an additional position for effects from foreign exchange rates caused by differences in average and spot rates.

What is Free Cash Flow?

Free cash flow is possibly the most critical number you can look at as a Rule #1 investor, yet it's not a number that's found very easily. In this video, I discuss how you can calculate free cash flow using the company's cash flow statement.

What's so Important about a Statement of Cash Flows?

The Statement of Cash Flows is extremely important for small businesses to understand how they obtained cash and where it went. Sometimes called the "Where Got - Were Gone" statement. Learn its importance and purpose.

it's really the sources and uses of cash in a business and why is this important well it's critical in forecasting the future cash needs of a small business again cash is king in a small business as I've said many times before.

so it's critical in knowing where did the money come from and where did the money go and that helps us then predict for the future than the income statement.

it is important to know is not the same thing as a statement of cash flow and that's what I want to go over with you today. some of those differences are net profit is not the same thing as cash flow because a business can be profitable and have no cash especially.

if it is selling merchandise or services on credit and we have a lot of accounts receivable but yet we still have to pay our bills on time the books can show that we're very profitable and we have no cash.

if we have no cash though to pay our bills it doesn't matter how profitable we are we're going to run into trouble as a small business.

Cash Flow: Why It's More Important Than Earnings

it all made sense cash flow was the key to understanding a company's financial health.

so why weren't investors paying attention most on wall street were really only concerned with congratulating management teams after they beat analyst estimates that were based on the guidance that management gave them.

so you see how that works and most dividend investors only cared if earnings were higher than dividends and this is the wrong way to look at a company cash flow is a company's lifeblood, not earnings now one of the questions I get all the time is how do you know if a dividend is safe because no one wants to invest in stock only to see its dividend get cut in half well the answer is you probably guessed by now is cash flow.

Intro to Cash Flow Statements | Direct and Indirect Method

Learn all about the Cash Flow Statement and how to prepare it using the Direct Method.

  • Cash Flow Accounting with the Direct Method (Part 2) 
  • Cash Flow Accounting with the Indirect Method (Part 3)

Many people have a hard time getting to grips with the Statement of Cash Flows, but in this episode of Accounting Basics for Beginners we break it down into nice and tasty, brain digestible chunks.  

You'll learn why CASH IS KING, and why the Direct Method is preferred by Investors.  We break down the Cash Flow Statement into its three sections:

  • Cash Flows from Operating Activities
  • Cash Flows from Investing Activities
  • Cash Flows from Financing Activities

Last but not least... I'll explain why despite all the advantages of the Direct Method.  Most corporations opt for the Indirect Method instead.

Prepare A Cash Flow Statement | Direct Method

In this video, we're going to rewind a bit and prepare that same cash flow statement using T Accounts, and both of these reports. We're going to use the direct method as we work out each number as we piece it together.

We're going to start off with the easy ones and move on to the harder calculations as we progress, so recommend watching this video through until the end to get a clear picture of the whole process. 

Let's begin… So here we have the cash flow statement for the Chudley Cannons and the plan is we're going to recalculate all of these numbers directly from the income statement and balance sheet for the same period.

Prepare A Cash Flow Statement | Indirect Method

In this video, we're going to cover preparing a cash flow statement using the indirect method. I've made a couple of videos on the direct method already where I explained the format and purpose of the cash flow statement and how to prepare it using T accounts.

This week we're going to use the same example income statement and balance sheet as we did last time. But we're going to prepare it using the indirect method instead.

 I recommend that you watch this video through to the end because I'm going to take you through all of the calculations step-by-step so that you'll have no problem putting one of these together by yourself. 

So without further ado let's get started… So what's the difference between the direct and indirect method anyway? The cash flow statement along with the income statement and the balance sheet make up the three major financial statements.

We use the cash flow statement to summarise the movement of the cash balance in the balance sheet over a period of time. Typically a quarter, or a year. And we do this by summarising all of the cash inflows and outflows into three categories. Cash flow from operating activities cash flow from investing activities and cash flow from financing activities.

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