As mentioned in the article on income statements the income statement indicates the profitability of a company’s operations while the balance sheet reveals the financial health of a company at a given point of time. However, both these statements tend to ignore the cash generating capacity of a business, and 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. We will show you a cash flow statement example for both, starting with the direct method.

 

Direct Method

 

The direct method for creating a cash flow statement reports major classes of gross cash receipts and payments.

 

 


Format of Statement of Cash Flows (Direct method)

Cash Flows from (used by) Operating Activities:

Cash Receipts from:

Customers$X,XXX
Interest$X,XXX
Total Cash Receipts$XX,XXX
Cash payments for:
Merchandise Purchases$X,XXX
Operating Expenses:
Employees$X,XXX
Payroll Taxes$X,XXX
Advertising$X,XXX
Supplies$X,XXX
Insurance$X,XXX
Miscellaneous$X,XXX
Total$XX,XXX
Interest$X,XXX
Income taxes$X,XXX
Total Cash Payments$XX,XXX
Net Cash Flows from Operating Activities$XX,XXX
Cash Flows from (used by) Investing Activities:
Proceeds of Notes Receivable$XX,XXX
Net Cash Flows from Investing Activities$XX,XXX
Cash Flows from (used by) Financing Activities:
Repayment of Mortgage$XX,XXX
Issuance of Common Stock$XX,XXX
Payments of Dividends($XX,XXX)
Net Cash Flow used by Financing Activities($XX,XXX)
Net Increase (Decrease) in Cash$XX,XXX

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