Cash flow statement

                        Definition of 'Cash Flow Statement'

A financial statement that reflects the inflow of revenue vs. the outflow of expenses resulting from operating, investing and financing activities during a specific time period


                                    "Specimen of Cash flow statement"

"There are 2 methods of cash flow statement"

1/ Direct Method

2/Indirect Method

Direct Method:(also called the income statement method) reports cash receipts and cash disbursements from operating activities. The difference between these two amounts in the net cash flow from operating activates. In other words, the direct method deducts from operating cash receipts the operating cash disbursements. The direct method results in the presentation of a condensed cash receipts and cash disbursements statement.

As directed from the accrual based income statement, Tax consultants Inc. reported revenues of $125,000. However, because the company's accounts receivable increased during 2003 by $36,000, only $89,000 ($125,000 − $36,000) in cash collected on these revenues. Similarly, company reported operating expenses of $85,000, but accounts payable increased during the period by $5,000. Assuming that payable related to operating expenses, cash operating expenses were $80,000 ($85,000 − $5,000). Because no taxes payable exist at the end of the year, the$6,000 income tax expense for 2003 must have been paid in cash during the year. Then the computation of net cash flow from operating activities is as follows:

Cash collected from revenues Cash payment for expensesIncome before income taxes Cash payments for income taxes Net cash provided by operating activities

$89,000 $80,000 --------- $  9,000 $  6,000 --------- $  3,000 ======

"Net cash provided by operating activities" is equivalent of cash-basis net income. ("Net cash used by operating activities" would be equivalent to cash-basis net loss)

2/ Indirect Method:(or reconciliation method) starts with net income and converts it to net cash flow from operating activities. In other words, the Indirect method adjusts net income for items that affected reported net income but didn't affected cash. To compute net cash flows from operating activities, noncash changes in the income statement are added back to net income, and net cash credits are deducted. Explanations for the two adjustments to net income in this example―namely, the accounts receivable and accounts payable―are as follows.

Increase in Accounts Receivable―Indirect Method:When accounts receivable increase during the year, revenues on an accrual basis are higher than on a cash basis because goods sold on account are reported as revenues. In other words, operations for the period led to increased revenues, but not all of these revenues resulted in an increase in cash. Some of the increase in revenues resulted in an increase in accounts receivable. To convert net income to net cash flow from operating activities, the increase of $36,000 in accounts payable must be deducted from net income.

Increase in Accounts Payable―Indirect Method:When accounts payable increase during the period, expenses on an accrual basis are higher than they are on a cash basis because expenses are incurred for which payment has not taken place. To convert net income to net cash flow from operating activities, the increase of $5,000 in accounts payable must be added back to net income.

As a result of the accounts receivable and accounts payable adjustments, net cash provided by operating activities is determined to be $3,000 for the year 2003. This calculation is shown as follows.

Net income Adjustments to reconcile net income to net cash provided by operating activities: Increase in accounts receivable Increase in accounts payableNet cash provided by operating activities

$(36,000) $   5,000

$34,000 ($31,000) ---------- $  3,000 =======

Note that net cash provided by operating activities is the same whether the direct or indirect method is used.