Statement of Cash Flows
The statement of cash flows is a document belonging to the annual accounts that reports on the origin and use of cash flows and their equivalents.
Cash flows are presented in a cascade format and the information presented refers to the year of formulation and the previous year. It also includes a column for possible cross-annotation with memory.
The information contained in the statement of cash flows reflects all the collections and payments made by the company in that year. It is intended to provide extensive information on the origin of cash (collections) and the use of that cash (payments) throughout the year.
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Cash flows will be the inflows and outflows of cash into cash accounts and other cash equivalents. It is considered cash to the treasury deposited in the box of entities and to the bank deposits in sight. The financial instruments capable of being converted into cash may also be considered as cash, provided they fulfill these three requirements:
- Its maturity at the time of acquisition does not exceed three months,
- There is no significant risk of variation in value,
- They are considered part of the usual management of the treasury
Is not incorporated into the cash flow statement the cash internal movements or purchase payments, charges for amortization or financial assets to which consideration has been given cash equivalents.
Methods to calculate the Statement of Cash Flows
For the formulation of the statement of cash flows, the direct and indirect method is used:
Statement of Cash Flows –The direct method:
It is formulated ordering the collections and payments based on the main categories to which they belong. With this method, the magnitudes derived from the different categories are presented by their gross amount.
Statement of Cash Flows The indirect method:
It is formulated starting from the profit shown by the income statement and then debugged with conciliatory items until reaching the effective balance in books. This method is more complex in practice and less used since some of the reconciliation items do not represent actual cash movements although they somehow affect the company’s ability to make payments.
Classification of cash movements by direct method
The classification of cash movements is based on three currencies.
- Cash flows from operational activities: Cash flows (collections and payments) derived from the main activity of the company with which it generates income and expenses.
- Cash flows from investing activities: payments arising from the acquisition of non-current assets (intangible assets, materials, real estate investments …) as well as the charges derived from the disposal, amortization or maturity.
- Cash flows from financing activities: These are collected from the acquisition by third parties of securities issued by the company or from resources granted by financial institutions, as well as payments made by the repayment or repayment of the same. Payments to shareholders in the form of dividends also fall within this category.
Objectives of the Statement of Cash Flow
Knowledge of the cash flows allows to offer valuable information of the company:
- It provides very useful information to company managers, in order to measure their accounting policies and anticipate possible problems.
- Improve funding and investment policies.
- It helps to know in which the company has spent the available cash to control the decapitalization of the same.
- It allows predicting future flows.
- Ability to pay interest and dividends, as well as their debts.
- Identify changes in production cycles
The goal of controlling cash is to take care of all the money that comes in order to program the money that comes out. A company may invest its cash in liquid assets such as money market assets, treasury bills, reports, and excess cash and will be accounted for as cash and cash equivalents. Therefore, a rigorous control of treasury will facilitate the success of the company.
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