STATEMENT OF CASH FLOWS

Information about cash flow is very important

in the management of cash, finance and
investment decisions. A statement of cash
flow simply shows how a firm has generated
and spent cash. It should be noted that more
businesses fail because of cash flow issues
than because they cannot achieve profit.

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Meaning of Cash Flows and Statement of
Cash Flows
Cash flows describe the amount of cash that a
firm generates in a given period. It is also
referred to as the inflows and outflows of cash
and cash equivalent.
 https://www.youtube.com/watch?
v=hMBN6yTIDb0

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The flow of money in and out of an
organisation is also known as cash flows.
Statement of cash flows summarises the
sources and uses of cash in a given period.
It reports a firm’s cash flows (inflows and
outflows) during an accounting period. It also
reveals the incoming and outgoing of cash in a
business.
Hence, it is a summary of cash receipt and cash
disbursement over a given accounting period.

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One usefulness of the statement of cash flows is
that it provides information about a firm’s cash
inflows and cash outflows during an accounting
period. It also enables management to know if
the firm is generating sufficient cash to invest in
capital projects required for the growth and
expansion of the business.

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Composition of statement of cash flows

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Uses of Statement of Cash Flows
To ascertain a firm’s cash position (cash inflows
and cash outflows) in a given accounting period.
It aids short-term planning of a firm.
The statement of cash flows aids management
in making financing and dividend decisions.
The statement of cash flows is very useful for
effective and efficient cash management of the
firm.
It helps to evaluate a firm’s present cash flows
and predict its future cash flows.
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Preparing a Firm’s Statement of Cash Flows
Operating activities
Investing activities
Financing activities

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Cash Flows from Operating Activities
Cash flows from operating activities show the
cash inflows and outflows arising from a firm’s
operating activities.
Net cash flows from operating activities is the
difference between the cash inflows and cash
outflows from a firm’s operating activities.

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 Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 st December 2019

Cash Flows from Operating Activities Using

Direct Method
Cash flows from operating activities N

Cash received from customers x

Cash paid to suppliers (x)

Cash paid to employees including expense (x)

Tax paid (x)

Interest paid (x)

Other incomes x

Net cash flows from operating activities xx

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 Here, account receivables were deducted
because its increase shows that cash was
Cash received Revenue - increase not received from customers, rather they
from customers in account are owing more, representing no cash
= receivables movement from prior year.
  or  
Revenue + Here, account receivables were added
decrease in because its decrease shows that cash was
account received from customers, representing
  receivables cash movement from prior year.
     
Here, inventory was added because its
increase shows that cash was paid to
suppliers as a result of buying more
inventory, representing cash movement
Cost of goods sold from prior year while account payables
+ increase in was deducted because its increase shows
inventory - cash was not paid to suppliers, rather they
Cash paid to increase in account are being owed more, representing no
suppliers = payable cash movement from prior year.
  or  
Here, inventory was deducted because its
decrease shows cash was not paid to
suppliers since they did not buy more
inventory, representing no cash
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Cost of goods sold movement from prior year while account