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Cash Flow Statement Basics
As mentioned in the article on ‘Income Statement Basics’ the income statement indicates the profitability of the company’s operations while the ‘Balance Sheet’ reveals the financial health of the company at a given point of time. However, both these statements tend to ignore the cash generating capacity of a business. Profitability does not always guarantee liquidity. Generating cash over time is very much essential for a company’s long-term survival, as it is required for conducting day-to-day operations. Many firms have failed due to a lack of cash on hand, even though their operations have been profitable. There are two methods of preparing a cash flow statement, the Direct and Indirect method. Direct Method: The direct method for creating a cash flow statement reports major classes of gross cash receipts and payments.
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Format of Statement of Cash Flows (Direct method) |
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Cash Flows from (used by) Operating Activities: |
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Cash Receipts from: |
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Customers |
$X,XXX |
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Interest |
$X,XXX |
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Total Cash Receipts |
$XX,XXX |
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Cash payments for: |
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Merchandise Purchases |
$X,XXX |
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Operating Expenses: |
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Employees |
$X,XXX |
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Payroll Taxes |
$X,XXX |
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Advertising |
$X,XXX |
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Supplies |
$X,XXX |
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Insurance |
$X,XXX |
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Miscellaneous |
$X,XXX |
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Total |
$XX,XXX |
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Interest |
$X,XXX |
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Income taxes |
$X,XXX |
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Total Cash Payments |
$XX,XXX |
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Net Cash Flows from Operating Activities |
$XX,XXX |
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Cash Flows from (used by) Investing Activities: |
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Proceeds of Notes Receivable |
$XX,XXX |
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Net Cash Flows from Investing Activities |
$XX,XXX |
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Cash Flows from (used by) Financing Activities: |
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Repayment of Mortgage |
$XX,XXX |
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Issuance of Common Stock |
$XX,XXX |
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Payments of Dividends |
($XX,XXX) |
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Net Cash Flow used by Financing Activities |
($XX,XXX) |
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Net Increase (Decrease) in Cash |
$XX,XXX |
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Cash Flow The Indirect Method
Financial Statement Basics
Balance Sheet Basics
Income Statement Basics