The Cash Flow Statementalso known as the cash flow statement, is an important instrument for the analysis of a company's cash flows within a given period.. Its aim is to create transparency about a company's cash flow. In principle, it relates to past periods. In the context of controlling, however, it can also be used for planning calculations.
The cash flow statement provides information about the causes of a particular financial position and shows how it develops during the accounting year. It takes into account both income and expenses that affect the stock of cash and cash equivalents and short-term investments.
The cash flow statement is flexible and can be adapted to individual requirements in order to examine specific business areas. A positive cash flow means that during the period under review more cash more cash has flowed in than has flowed out.. A distinction must be made between income and expenses, revenues and expenses, and cash inflows and outflows. Only the inflows and outflows of cash and cash equivalents are relevant. This account is an essential tool for obtaining information and managing the company. It provides data on past, present and future liquidity. It also serves as an indicator of the current ability to meet upcoming obligations. The structure of the cash flow statement and possible approaches to interpretation are considered later in the article.
Aumico offers a practical tool for the automated preparation of the annual financial statement. Perfect for trustees, SMEs and foundations. From the items of the balance sheet and income statement, aumico automatically creates the cash flow statement according to the indirect method. In the following, the structure of the cash flow statement as well as possible interpretation approaches are examined in more detail.
Structure of the cash flow statement
The cash flow statement is a comparison of the cash inflows and outflows of a period. In the context of dynamic liquidity analyses, a period-related liquidity assessment is carried out. The aim of the analysis is to determine whether a company can meet its payment obligations at all times. Cash flow statements basically serve to disclose the cash flows of a reporting period that has already expired. They provide information on the origin and use of liquid funds during the reporting period and document investing and financing activities. In the cash flow statement, the change in current net assets is explained by the changes in non-current net assets.
In principle, a cash flow statement can be prepared using two different methods the direct method or the indirect method. The direct method consists of income and expenses with each other compare and calculate the cash flow as a balance. With the indirect method the result of the income statement forms the basis for the cash flow statement.. Differences always arise when expenses and income do not result in cash outflows or cash inflows.
A basic distinction is made between cash flow from operating activities, investing activities and financing activities.
Cash flow from operating activities
The cash flow from operating activities comprises the The main cash-generating activities of the company that are geared to generating revenue as well as other activities that cannot be allocated to investing or financing activities. As the difference between current operating cash inflows and outflows, it represents the internal financing potential of a company and is available for debt repayment, investments and distributions or withdrawals by shareholders. Both the direct and the indirect method are permissible for determining the cash flow from operating activities. The indirect method is generally recommended. This is based on the annual result.
Cash flow from investing activities
Cash flows from investing activities are derived from cash flows in connection with with the resources that are to be used to generate income in the long term .. Cash flows from investing activities show cash movements on the purchase and sale of buildings, machinery or other items of fixed assets. These investing activities include both the purchase and sale of assets, intangible assets, and the proceeds in the form of interest and dividends. Thus, it is basically movements in liquidity caused by the management of fixed assets.
Cash flow from financing activities
Cash flows from financing activities generally include the cash flows to be allocated to cash flows transactions with shareholders and from the and from the borrowing or repayment of financial debt. financial liabilities. Financing activities include the borrowing and repayment of own or third-party funds, the payment of interest and the payment of dividends. The cash flow from this activity illustrates the movements in financial resources resulting from the raising of long-term debt or the increase in equity equity.
Interpretation of the cash flow statement
In principle, the cash flow statement is intended to inform shareholders, stakeholders, and management about informwhich underlying causes of a change in cash and cash equivalents. In particular, the following can be identified for the period under review:
- Internally generated funds (cashflow from operating activities)
- Funds available for debt repayment and distribution
- long-term investment and financing transactions
- Amount and causes of the change in liquidity
The Cash Flow Statement provides information about the susceptibility to insolvency of a company. In addition, inconsistencies between the net profit or loss for the year and the associated cash flows can be revealed. As a result, the cash flow statement can be interpreted as a liquidity-oriented actual income statement. It is detached from the rigid view of an income statement, which is also influenced by accrual aspects. This option generally makes it easier to monitor a company. The Cash flow is not the same as the profit from the annual result. From a business management point of view, meaningful entries such as depreciation and allocations to provisions are eliminated. This means that cash flow cannot be used as a basis for performance-related compensation.
The Cashflow is of limited meaningfulness only if the value of cash generation is interpreted in a profit-like manner. However, the basic idea is that cash flow should not reflect profit. Rather, it is intended to supplement it with the liquidity component.
Profit and loss cash flow analyses
As the difference between current operating cash inflows and outflows, the cash flow represents the internal financing potential of a company. company. The internal financing potential is available for investments, debt repayments, distributions or withdrawals, and tax payments. Cash flow can be determined directly or indirectly. In a direct calculation, all operating, cash-effective income and expenses are offset. In external balance sheet analysis, indirect calculation is the norm. This is based on a balance sheet performance indicator.
For external observers, the cash flow statement offers a wide range of possibilities. It sometimes forms the basis of a financial assessment of a company (group) with regard to the origin and use of financial resources. A cash flow statement can be used to forecast whether a company is capable of generating financial surpluses in the future, making distributions to the owners and meeting its financial obligations.
Have your cash flow statement created in the tool of aumico easily from the items of the balance sheet and income statement. Want to learn more about the aumico application? Take a look at our product demo or book a live demo and let us guide you through the tool.
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