What is Reporting Cash Flow? 

Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.

Overview of Cash Flows 

Cash plays an important role in the economics of life of a business firm need cash to make payment to its supplier, to pay wages and salaries, to meet day to day expenses. Any firm needs to maintain an adequate balance of cash. A cash flow statement is the summary of the causes of change in the cash position of a firm.

A statement of changes in the financial position of a firm on a cash basis is called a cash flow statement. The cash flow statement describes the inflows and outflows of cash. All cash inflows mean cash receipts and all cash outflow means cash payments.

This statement emphasizes how the earnings and spending of the cash are being managed by the company. If a company is having its cash from most of the financing operations, then, investors will not invest because it is not making profits from its business activity instead the company is only having cash from finances.

Example 

Suppose, there is a retailer who sells toys, so the cash inflow from the sales and cash flows for making such sales are the operating activities. These activities help to operate normal business operations.

Further, the retailer purchased the furniture for his shop and if he sells it in the future then, loss or gain on the sale also belongs to the operating activity but cash inflow from the sale will be the investing activity.

Similarly, if the same retailer invests in the stock of a certain company, then, dividend on shares are inflows under financing activity.

A Cash Flow Statement 

The cash flow statement starts with the opening cash balance and bank balance. All the inflows are added with the opening balance and outflows are subtracted from it. Two things are considered while preparing a cash flow statement that is as below:

• Sources of cash flows
• Application of cash flows

Generally, a cash flow statement prepares in two forms: -

• Report form
• T-form

Format of Report form of cash flow statement is as below:

Format of T-form of cash flow statement is as below: 

Methods of Preparing Cash Flow Statement 

• Direct Method 
• Indirect method 

Direct Method 

The direct method uses all the cash flows which are related to those items that will change the cash flows of the company. The benefit of the direct method is that it represents the operating cash receipts and payments. The drawback of this method is that the collection of the data required here is very much difficult. Thus it affects the decision-making of the managers. The following items are required in the proforma of this method:

• Interest paid
• Income tax paid
• Interest and dividend received
• Cash paid to employees and suppliers
• Cash received from customers

Direct method format 

Indirect Method 

This method mainly changes the statement from the accrual method of accounting to a cash basis. Thus, it uses the items of the balance sheet and net income to modify the operating part of the statement. 

The indirect method mainly concentrates on the uses and sources of the cash of a particular company. The company has to maintain its accounting sufficiently as all the financial statements of the company are monitored by the creditors, investors, and other stakeholders. While calculating the cash flows from operating activity, all increases or decreases in the items of the balance sheet are being adjusted from the Net income of the company. 

Indirect method format 

Uses and Importance of Cash Flow Statement 

• A cash flow statement is used to evaluate the cash position of a firm. 
•  It helps in business planning regarding the loan repayment, purchase or sale of fixed assets, and other long-term planning of cash. 
•  A cash flow statement helps to determine the reasons behind the poor cash position of a firm. 
• By preparing the cash flow statement, a firm can come to know how much cash will be earned by the firm and how much cash will be required to make all payments like loan repayment, replacement of assets, and redemption of stock and debts. 
• By preparing the cash flow statement, companies become answerable to financial queries like What are the reasons behind low profit? Where did the profits go? And why extra dividends should not be paid despite having sufficient available profits?

Key Takeaway 

• The cash flow statement consists of three main activities operating activity, investing activity, financing activity. It consists of all cash inflows and cash outflows during the reporting period. 
• The main important thing which needs to remember is the operating activity of the cash flow statement ends with the net cash used by the operating activity. this is the important line item on the cash flow statement. 
• The first activity is operating activity which is consists of all operational business items. 
• The second activity is investing activity which is consists of gains or losses from the investments of the company. 
• The third activity is financing activity which is consists of cash utilization from the company's equity and debts. 

Context and Applications 

The topic is significant in the professional exams for both undergraduate and postgraduate courses, especially for: 

• B. Com (Bachelor of Commerce) 
• BBA (Bachelor of Business Administration) in Finance 
• MBA (Master of Business Administration) in Finance 
• CFA (Chartered Financial Analyst)