Cash Flow Statement

In order to prepare cash flow statement applying indirect method information required is indicated in the figure below:

Income statement indicates profit or loss earned for the year, which must be adjusted from accrual and matching principles to cash principle, also income statement provides information on the preferred stock dividends declared. Balance sheets to be used to estimate impact of changes in assets, liabilities and equity on the cash for the year. Current year statement of changes in equity provides information on the common stock dividends declared. As it is indicated in the figure below, the statement consists of the three main parts:

1st part – cash flow from (to) operating activities. This part reflects cash inflow and outflow related to the ordinary activities of the company. For example if we have a trading company, this part would include inflow and outflow from trading activities including changes in working capital used in trading activities. If we have a company which is involved in constructing and selling of real estate, this part of cash flow statement would include inflow and outflow from construction and trading of real estate including changes in working capital used in real estate construction and trading activities.

2nd part – cash flow from (to) investing activities. This part reflects cash used in investing activities, i.e. acquisition of fixed assets and other investments to be used by the company for a long period. Inflow in this part represents cash received from sales of prior investments, i.e. sale of fixed assets and investments.

3rd part – cash flow from (to) financing activities. This part includes cash received from various financing sources, creditors or investors (shareholders) and cash paid to these financing sources, i.e. repayment of debt to creditors, payment of dividends to shareholders, repayment of share capital to shareholders. This statement preparation process is provided in the figure below.

This statement preparation process starts from preparing three constituent parts of it and calculating net cash flow to or from the area of activities in each part. After these parts are prepared net cash flows are added together and the result is compared with the change of cash for the year obtained from last year and current year balance sheets. These figures must be equal and if there is no equality while preparing the statement mistakes were made. The equality is obligatory, as the statement is a specification of the change in cash for a given period (i.e. a year), which means that cash flow statement indicates in detail sources of cash inflow and reasons of cash outflow, which in total gives difference between last year and current year cash balance.