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.
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:
|Total Cash Receipts||$XX,XXX|
|Cash payments for:|
|Total Cash Payments||$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|