In the line of business, under accounting, a cash flow statement is a financial document that is used to indicate changes within balance sheet accounts and other cash options, as well as provide a clear analysis of operational, investment, and financial activities within a business. It reveals a company’s liquid assets, giving a glimpse of the company’s financial assets and obligations over some time. It is divided into three major components; investing, operating and financing (Reid, 2018). Operation activities include production, distribution, and other aspects such as marketing. Financing activities include stakeholder inflow cash such as banking and outflow cash activities such as dividends to stakeholders. Investment activities include the purchase and sales of assets such as land and marketable securities.
Investing and financing activities that do not affect cash flow normally referred to as noncash investing and financing activities. These activities are reported at the bottom of a cash flow statement. Some examples of these activities include exchanging non-monetary assets for other non-monetary assets and issuing company shares for dividend or bond purposes (Reid, 2018) though they do not directly affect the cash flow of a company but can affect the capital configuration of the company.
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The main difference between direct and indirect methods of reporting mainly involves cash flow from operating activities. When employing the indirect method of reporting cash flows, the financial statement will start by mentioning the company’s net income, followed by financial adjustments necessary to convert the incremental net income into cash flows from operating activities (Williams & Dobelman, 2017). When using the direct method, a company’s cash flow statement would instead list the cash amount received and paid out of the company. The direct method of reporting also mandates a reconciliation of the net income to cash generated from operating activities.
References
Reid, W. (2018). The meaning of company accounts . Routledge.
Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific Book Chapters , 109-169.
