Cash flow statement is a financial statement that presents information about cash receipts and disbursements of the company in a period. For that reason, in compiling data and information needed about cash receipts and disbursements appropriately.
For example, income will be recorded as cash inflows, as for the intended income is cash income. While cash outflows can be obtained from expenses that must be paid by the company.
The various activities carried out by the company will be recorded in the cash flow statement based on their classification. As you know, the cash flow statement is divided into three sections which are adjusted based on the activities carried out such as cash flow from operating, investing and financing activities.
That way, cash flow statements can provide information and help you to conduct financial evaluations and decision making.
However, are you able to read the cash flow statement correctly? To be able to understand each part, of course you must be able to read the cash flow statement first. So the decisions made will be correct and correct. The following will explain how to read the cash flow statement.
Understand the Difference between Cash and Profit
A financial statement generally consists of an income statement, changes in capital, balance sheet, and cash flow. This time only the income statement and cash flow will be discussed, why? Some people and maybe one of them you think that the profit generated in the income statement is cash. This is a mistake so we need to understand the difference between cash and profits.
Cash is one of the liquid assets. While profits can be regarded as profits derived by the company from its activities or operational activities. You need to know that not all profits are cash. Companies that make a profit or profit can also have no cash or cash, and companies that have cash can not be sure that they get a profit.
So, profit and cash cannot be compared. The income statement will show the results obtained by the company in a period and the cash flow statement provides information about the amount of money or cash received and issued.
Cash from Operating Activities
Operating activities are the main activities of the company to generate revenue and are directly related to cash. Most operating activities come from the sale of products or services. In addition, income from payment of trade contracts, royalties, commissions or fees is also classified in this activity. While the cash outflows take the form of costs such as payment of salaries, taxes, shipping costs, and other operational costs.
In operating activities, assets and debt accounts such as accounts receivable, accounts payable, net income, inventories and others will appear. You need to remember that income is different from cash. Therefore, you need to make adjustments where in the end you will get information about cash flow information.
So, on the cash flow from operating activities you can conclude whether in that year more generate profits or operating money.
Cash from Investment Activities
Investments are often made by businesses to develop their companies. To simplify the monitoring process, you can see it in the cash flow statement from investment activities. Cash flows from this activity are usually in the form of income from the sale of land, buildings and equipment.
In addition, the acquisition of shares and other financial instruments is also included in this activity. Meanwhile, cash disbursements from this activity such as the purchase of good assets, fixed assets, intangible assets and long-term assets.
So, from the cash flow statement of investment activity, you can see whether the company in the current year made an investment and what type of investment was taken. That way, you can also assess the risks that can occur in the future.
For external parties, this report can be used as a form of your responsibility for communication and transparency. In addition, this report will greatly help assess the performance of your company.
Cash from Funding Activities
Funding activities are related to owner investment, prizes, and loan funds made by the company. Some funding activities that are often performed or appear on the cash flow statement of funding activities are stock issuance, bond issuance, loans, notes, mortgages.
On the other hand, for expenses such as cash payments to shareholders and repayment of loans. So here you can see cash as a financial activity that will cause changes in the amount, composition of capital and loans.