cash+flow+statement

A **cash flow statement** shows how changes on the balance sheet and income statement affect cash and cash equivalents held by a business. The cash flow statement presents the flows of cash in and out of the business occurring through operating, investing, and financing activities. The statement of cash flows is useful in determining the short-term viability of a business, particularly its ability to pay its obligations.

Topics

 * Methods of constructing cash flow statements
 * Treatment of dividends

Methods of constructing cash flow statements
There are two methods for constructing information in cash flow statements: **Direct Method** and **Indirect Method**


 * [[image:emersondirect.png width="432" height="390"]] || ==Direct Method of Preparing a Cash Flow Statement ==

The direct method for creating a cash flow statement reports major classes of cash receipts and payments occurring within each of the three categories. Unlike the indirect method, the direct method relies solely on information provided in the income statement to sum total cash flows. As the lines in the figure to the left marked with "Cs" show, the net increase in cash is added to the cash balance from the previous period’s balance sheet to determine the new cash balance for the current balance sheet. ||
 * [[image:Cash_Flow_Example.gif]] || ==Indirect Method of Preparing a Cash Flow Statement ==

The indirect method uses net-income as a starting point, makes adjustments for all transactions for non-cash items, and then adjusts from all cash-based transactions. An increase in an asset account is subtracted from net income, and an increase in a liability account is added back to net income.

As the example to the left shows, a decrease in accounts receivable counts as a net increase in cash flow because accounts receivable are turned into cash. Likewise, the increase in accounts payable represents a liability that would otherwise have been counted as an outflow of cash (e.g., a payment to suppliers). Finally, the increase in inventory represents a net decrease in cash because it represents an increase in a current asset that would otherwise be converted to cash. ||

Treatment of dividends
When a business //pays dividends// to its shareholders, this action is falls under the category of a financing activity. Therefore, payments of dividends appear as cash outflows in the financing activities section of the statement of cash flows.

When a business //receives dividends// from a company in which it has invested or from marketable securities it owns, these dividends are reported as an operating activity. Dividends received are an indication of income coming into the business as they are paid out as a result of the business's use of its current assets.