Cash Flow Statement

Cash Flow Statement is one of the important financial statements along with the Balance Sheet and Profit & Loss Statement. It reports the cash scenario of the company i.e. the cash generated and spent during a specific period by the company. It helps to link the balance sheet with the profit & loss statement by indicating the movement of money within the business. It is part of the statutory financial statements to be presented annually by companies in the annual reports.

Cash Flow comprises of three main sections:

• Cash from Operating Activities: These are majorly related to the sales, purchase and other expenses i.e. key operations of the company. Cash from operating activities can be presented in either of the two forms:

1. Direct Cash Flow: It is rarely used but is quite simple, as it takes cash in from the sales and cash out from purchases and other direct expenses. It is not as common as the indirect presentation of cash flows.
2. Indirect Cash Flows: It is a reconciliation of the net profits to cash flow and is generally presented as:

Profit + Depreciation + Amortization +(-) Change in Working Capital +(-) Change in Provisions + Tax

• Cash from Investing Activities: Non-current assets such as buildings, plant, property, other financial assets, etc. when acquired or sold are reported in cash from investing activities. Basically any money spent on Capital Expenditure or Capex is an outflow from investing activities and any sale of fixed assets is an inflow from investing activities.
• Cash from Financing Activities: Financing activities involve any changes in the equity capital or the borrowings of the company. They get reduced when a company pays out its debt or buys-back shares and increase when the company borrows more money or raises money through sale of shares. Even dividend payment is considered as a financing activity (as it is an outflow related to share capital which is a financing activity) and thus cash from financing activity gets reduced when dividend is paid. 

Usually, the interest paid and received are treated as operating cash flows, but depending on the nature and business of the company, the interest income or expense can also be taken in investing and financing activity respectively.

Below is an extract of the Cash Flow statement of Company PQR listing the key components –

Proforma Cash Flow Statement of Company PQR for the year ended 31^st March 2018

Cash Flow Statement forms an important part of analysis and most of the investors use it to carry out discounted cash flow (DCF) valuation by using Free Cash Flow method.