Statement of cash flows


The statement of cash flows is one of the financial statements of accounting, it reports on the origin and use of cash flows and their equivalents.

The cash flows are presented in a cascade format and the information presented refers to the year of formulation and the previous one. It also includes a column for possible cross-memory annotations.

The information contained in the statement of cash flows reflects all the receipts and payments made by the company in that year. This is intended to provide extensive information on the origin of the cash (collections) and the use of that cash (payments) throughout the year.

The cash flows will be the inflows and outflows of cash in the accounts of cash and other equivalent liquid assets. Cash is considered to be the treasury deposited in the bank of entities and the bank deposits at sight. Financial instruments that can be converted into cash may also be considered cash provided they meet these three requirements:

  • Its expiration date at the time of acquisition does not exceed three months.
  • There is no significant risk of variation in its value.
  • They are considered part of the usual management of the treasury.

The internal movements of treasury or the acquisition payments, amortization charges or financial assets that have been considered as equivalent liquid assets are not included in the statement of cash flows.

Methods for calculating the Statement of Cash Flows

For the formulation of the statement of cash flows, the direct and indirect method are used:

  • The direct method: It is formulated by ordering the collections and payments based on the main categories to which they belong. With this method, the figures derived from the different categories are presented by their gross amount.
  • The indirect method: It is formulated starting from the profit thrown by the income statement and then debugging it with conciliatory items until the effective balance in books is reached.This method is more complex in practice and less used since some of the conciliatory items do not represent real cash movements, although they somehow affect the company's ability to make payments.

Classification of cash movements by the direct method

The classification of cash movements is made based on three monetary flows.

  • Derived from operating activities: These are the cash flows (collections and payments) derived from the main activity of the company with which it generates income and expenses.
  • Derived from financing activities: These are collections from the acquisition by third parties of securities issued by the company or of resources granted by financial entities, as well as payments made for their amortization or return. Payments to shareholders in the form of dividends also fall into this category.
  • Derived from investment activities: These are the payments derived from the acquisition of non-current assets (intangible assets, materials, real estate investments ...) as well as the charges derived from the sale, amortization or maturity.

Objectives of the Cash Flow Statement

Knowing the cash flows allows you to offer very valuable information about the company:

  • It provides very useful information to company administrators, in order to measure their accounting policies and anticipate possible problems.
  • It makes it possible to improve financing and investment policies.
  • It helps to know how the company has spent the available cash to control the decapitalization of the same.
  • It allows to predict future flows.
  • Ability to pay interest and dividends, as well as your debts.
  • Identify changes in production cycles

The purpose of controlling cash is to take care of all the money that comes in in order to program the money that goes out. A company can invest its cash in liquid assets such as money market assets, treasury bills, repos, excess cash and will be accounted for as cash and equivalents. Therefore, a rigorous treasury control will facilitate the success of the company.

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