the cash receipts from customers to obtain a
correct figure of cash flow from operating
Statement of Cash Flows
A statement of cash flows is a financial
statement which summarizes cash
transactions of a business during a given
accounting period and classifies them
under three heads, namely, cash flows from
operating, investing and financing
activities. It shows how cash moved during
the period by indicating whether a particular
line item is a cash in-flow or a cash out-flow.
The term cash as used in the statement of
cash flows refers to both cash and cash
equivalents. Cash flow statement provides
relevant information in assessing a company's
liquidity, quality of earnings and solvency.
1. Cash Flows from Operating Activities
This section includes cash flows from the
principal revenue generation activities
such as sale and purchase of goods and
services. Cash flows from operating
activities can be computed using two
methods. One is the Direct Method and
the other Indirect Method.
Direct Method
The direct method to calculate cash flow from
operating activities involves determination of
various types of cash receipts and payments
such as cash receipts from customers, cash
paid to suppliers, cash paid for salaries, etc.
and then putting them together under the cash
flow from operating section of cash flow
statement. These figures are calculated using
the beginning and ending balances of various
accounts of the business and the net increase
or decrease in the account. The exact
formulas to calculate various cash inflows and
outflows vary. The most importan ones are
given below:
Formulas
Cash Receipts from Customers =
+ Net Sales
+ Beginning Accounts Receivable
− Ending Accounts Receivable
 
Cash Payments to Suppliers =
+ Purchases
+ Ending Inventory
− Beginning Inventory
+ Beginning Accounts Payable
− Ending Accounts Payable
 
Cash Payments to Employees =
+ Beginning Salaries Payable
− Ending Salaries Payable
+ Salaries Expense
 
Cash Payments for Purchase of Prepaid Assets =
+ Ending Prepaid Rent, Prepaid Insurance etc.
+ Expired Rent, Expired Insurance etc.
− Beginning Prepaid Rent, Prepaid Insurance etc.
 
Interest Payments =
+ Beginning Interest Payable
− Ending Interest Payable
+ Interest Expense
Income Tax Payments =
+ Beginning Income Tax Payable
− Ending Income Tax Payable
+ Income Tax Expense
In the formulas given above it is assumed that
accounts receivable are only used for credit
sales. It is also assumed that all sales are on
credit. If there are cash sales as well, then
receipts from cash sales must be included in
activities.
Similarly, it is assumed that accounts payable
are used merely for purchases on account and
that all purchases are on credit. If there are
cash purchases as well, then cash payments
for them must be included in the cash paid to
suppliers. It is important to note that here may
be receipts & payments other than those
discussed above.
Once the all the cash inflows and outflows
from operating activities are calculated, they
are added in the operating section of
cashflows to obtain the net cashflow from
operating activities.
Indirect Method
The first section of a cash flow statement,
known as cash flow from operating activities,
can be prepared using two different methods
known as the direct method and the indirect
method. Here we will study the indirect method
to calculate cash flows from operating
activities.
In indirect method, the net income figure from
the income statement is used to calculate the
amount of net cash flow from operating
activities. Since the income statement is
prepared on accrual basis in which revenue is
recognized when earned and not when
received therefore net income does not
represent the net cash flow from operating
activities and it is necessary to adjust earnings
before interest and tax (EBIT) for those items
which effect net income although no
actual cash is paid or received against them.
Formula
The following is the indirect
method formula to calculate net
cash flow from operating
activities:
Cash Flows from Operating Activities:
Net Income
+ Non-Cash Expenses:
(Depreciation, Depletion & Amortization Expense)
+ Non-Operating Losses:
(Loss on Sale of Non-Current Assets)
− Non-Operating Gains:
(Gain on Sale of Non-Current Assets)
+ Decrease in Current Assets:
(Accounts Receivable, Prepaid Expenses,  operating activities or an inflow from investing
− Increase in Current Assets
+ Increase in Current Liabilities:
(Accounts Payable, Accrued Liabilities, Income Tax Payableonly.
− Decrease in Current Liabilities
= Net Cash Flow from Operating Activities
OR
SAMPLE THE ( ARMOUR INC DATA
STATEMENT OF CASHFLOW)
2. Cash Flows from Investing Activities
Cash flows from investing activities are
cash in-flows and out-flows related to
activities that are intended to generate
income and cash flows in future. This
includes cash in-flows and out-flows from
sale and purchase of long-term assets.
is the second section of a statement of cash
flows which details cash flows related to
acquisition and disposal of a company's long-
term investments such as property, plant and
equipment, investment in subsidiaries and
associates, etc.
Cash flows from investing activities is
separately reported because it tells the
users of the financial statements whether
the company is investing in resources that
are expected to result in increased profits
in future periods or whether it is disposing
out resources already owned.
Following are cash flows that are typically
reported as cash flows from investing
activities:
1. Cash payments to acquire or construct
long-term fixed assets such as plant and
machinery, vehicles, equipment, etc.
2. Cash receipts from sale of PPE and
intangible assets such as buildings,
copyrights, etc.
3. Cash payments to purchase bonds or
shares of other companies (subsidiaries,
associates and joint ventures).
4. Cash receipts from sale of bonds and
shares of other companies.
5. Cash payments in the form of loans and
advances and receipt related to payback
of such loans and receivables, etc.
In general, US GAAP and IFRS converge on
classification of cash flows from investing
activities. However, there are some
exceptions: IFRS allows dividend income
earned on investment in shares and interest
earned on loans and advances to other parties
to be classified as either an inflow from
activities while US GAAP requires it to be
reported under the cash flows from operating
activities
etc.)
SAMPLE THE ( ARMOUR INC DATA
STATEMENT OF CASHFLOW)

3. Cash Flows from Financing Activities
Cash flows from financing activities are
the cash flows related to transactions with
stockholders and creditors such as
issuance of share capital, purchase of
treasury stock, dividend payments etc.
Cash flows from financing activities is the last
of the three sections of a statement of cash
flows. It shows the cash inflows and outflows
related to transactions with the providers of
finance i.e. the owners and the creditors of the
company. Thus, cash flows from financing
activities include the following basic
components:
 Proceeds from borrowings (both short-term
and long-term)
 Cash received from owners usually
on issuance of stock
 Repayments of borrowings
 Repayments to owners
However certain items are classified differently
by different accounting standards. For
example, under IFRS( INTERNATIONAL
FINANCIAL REPORT STANDARD), interest
payments and dividend payments are
classified either as cash flows from operating
activities or cash flows from financing
activities. Under US GAAP interest payments
can only be classified as cash flows from
operating activities and dividends can only be
classified as cash flows from financing
activities.
Example
Cash Flows from Financing Activities
Loan Obtained 20K
Issuance of Common Stock 125K
Treasury Stock Purchased -32K
Dividends Paid -10K
Net Cash Flow 103K
from Financing Activities
Cash and Cash Equivalents
'Cash and Cash Equivalents' is an asset that
appears on the statement of financial position
of a business and includes currency (coins
and bank notes) held by a business (in hand
and in bank accounts) and cash equivalents.
Cash is a medium of exchange, a store of
value and a unit of account and a business
needs to have sufficient cash in order to be
able to pay its liabilities. Higher cash ratio
(ratio of cash and cash equivalents to current
liabilities) suggests that the business is liquid
(i.e. it is expected not to face any difficulty in
paying its very short-term liabilities).
A business generates cash from sale of
products and services, sale of assets,
borrowings from banks and other creditors and
from capital contributions by its owners. It uses
cash to pay for its operating and capital
expenditure, its liabilities and in paying
dividends to its owners. Information about
sources and uses of cash are presented in
the statement of cash flows.
Businesses keep a small amount of cash
(called petty cash) for day to day cash
expenses and keep a larger percentage of growth-oriented investors from buying a
cash at its bank. Control over cash is vital for company's stock, since they want the firm to
efficient and profitable operations of a re-invest all cash in the business, which
business that is why businesses prepare their presumably will jump-start earnings and
cash and bank reconciliations periodically. lead to a higher stock price.
Cash equivalents are not precisely coins and
bank notes but are marketable securities of
very short-term maturity (typically always less
than 3 months) which are not expected to
deteriorate significantly in value till maturity.
They are treated as equivalent to cash under
IAS 7 Statements of Cash Flows.
To know the OPEX =TOTAL OPERATING
EXPENSE / TOTAL SALES
To know total expense =Total operating
expense +total non cash
To know the GP rate = Gross Profit / total
sales
The final FS is the SOCF, it sometimes
refer to as a sources and uses statement as
shows of sources of cash in the company.
and how it used over the period of time.
Many people don’t focus on the cashflow
they simply want to know if thw company is
profitable and how strong liquidity it is.
 Other people say that the SOCF is the
most important statement bec. They can
paid for what they sell thru companies
cashflow.
 NET INCOME is a profitability measure
not a cash measure.
 CFOA is a key measure of core company
Business activities. A Primary
 UNREALIZE LOSSES
Dividends are a portion of a
company's earnings  which it returns
to investors , usually as a cash payment.
The company has a choice of returning
some portion of its earnings to investors as
dividends, or of retaining the cash to fund
internal development projects or
acquisitions. A more mature company that
does not need its cash reserves to fund
additional growth is the most likely to issue
dividends to its investors. Conversely, a
rapidly-growing company requires all of its
cash reserves (and probably more, in the
form of debt ) to fund its operations, and so
is unlikely to issue a dividend.
Dividends may be required under the terms
of a preferred stock  agreement that
specifies a certain dividend payment at
regular intervals. However, a company is
not obligated to issue dividends to the
holders of its common stock .
Those companies issuing dividends
generally do so on an ongoing basis, which
tends to attract investors who seek a stable
form of income over a long period of time.
Conversely, a dividend tends to keep