Three Types of Statement of Cash Flow and When to Use Them
Statement of cash flow is a financial statement which
reports the amount of cash and cash equivalents that are received, spent and
invested over a specific period of time. Depending on your business’s needs,
you may choose to use more than one format for your statement of cash flow
reports. Here are three common types of statements and when to use them.
The direct method for preparing a statement of cash flow
involves starting with your net income figure. From there, you adjust for any
non-cash items, such as depreciation, amortization, or write-offs. Next, you
account for changes in working capital, such as inventory or accounts
receivable. Finally, you factor in any other cash inflows or outflows, such as
interest payments or investments. These three steps will help you generate the
first two lines on the statement of cash flows: operating activities and
investing activities. After generating these numbers, it's time to calculate
your total change in cash position. If this number is positive, then you had a
good year; if it's negative, then you'll need to find more money from somewhere
before next year.
The indirect method is the most common way to prepare a
statement of cash flow. It begins with net income, then adjusts for items that
don't affect cash flow, such as depreciation. From there, you'll need to
account for changes in working capital, then calculate cash from operating
activities. You can then add back non-cash charges like amortization or
depreciation. Finally, subtract your sources of cash outside of normal
operations (such as selling investments). That will give you your total cash
available for financing, investing, and all other purposes.
A direct approach would be similar to the indirect approach
but it would not include adjustments for depreciation or changes in working
capital. Instead, it would just focus on the more basic change in cash during
an accounting period: operating activities less investing activities plus
financing activities equals net change in cash during an accounting period.
The Hybrid Method is the most common type of statement of
cash flow. It combines aspects of the direct and indirect methods to give a
more accurate picture of your business's cash flow. This method is best for
businesses that have a good understanding of their cash inflows and outflows.
As an example, let's take an e-commerce store. Direct expenses are incurred in
the manufacturing process and direct expenses are incurred in shipping items
from one location to another. Indirect expenses include items like marketing,
maintaining a website, or payroll for employees who work on those operations
but don't incur any direct costs associated with them (like manufacturers or
shippers). All three types of statements show how much money you've spent or
received during a certain time period. They all report different information
about your company's financial health at the end of that time period. One thing
they all have in common: they're not designed to be used as standalone
statements!
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