Cash Flow Statement

Cash Flow Statement is an integral part of the financial statements. It shows the sources of cash and its usage for a particular period of time. It shows where the cash is coming from and what it is being spent on. Some believed that cash flow is a better representation of a company health than net profits.

Net profits in the Income Statement are based on accrual principle. For example, a sale made to a customer who has not paid up will be included in Income Statement as part of the net profits but excluded from the Cash Flow Statement. As such, businesses may be showing a profit but has a cash shortfall. A lot of businesses could not survive due to poor cash management. Hence, cash is the livelihood of any business and Cash Flow Statement shows the ability of a business to pay its creditors.

In the Cash Flow Statement, the sources and usage of cash can be categorized into:

  • Operating activities

These are cash flows from the core operations of the business. Usually, net income from the Profit Statement is used as the starting point to prepare the Cash Flow Statement. Non-cash items are then added back or deducted from the net profits. For example, depreciation, which is an accounting way of expense an asset over its useful life, does not involve any cash transaction. Hence, depreciation is added back to net profits.

Cash inflows or outflows for operating activities are also implied from changes in balance sheet items between two accounting period. For example, since we are interested in cash sales and not total sales (which include sales on credit terms), any reduction in accounts receivable is added to the net sales as it is assumed that cash is received from customers. Similarly, any increase in accounts receivable is deducted from net sales as this implies that customers are purchasing on credit.

Similarly, inventories increase implies purchases are made and the increase is deducted from net sales to reduce the cash inflow from sales. However, if the inventories are purchased on credit instead, the accounts payable would have increased. The increase in accounts payable will be added back to net sales to reflect the lesser cash outflow.

  • Investing activities

Investing activities are usually from purchase or sale of fixed assets (for example, equipment, furniture and properties) or other investments. The increase in the gross balance of fixed assets implies cash outflow for the purchase of these assets. And decrease in the gross balance of fixed assets implies cash inflow from the sale of these assets.

  • Financing activities

Interest on loans and dividends are financing activities and could be either cash inflow or outflow, depending on the situation. For example, if a company raised financing by issuing preference shares to the shareholders, the capital received is reflected as cash inflow. When dividends are then declared for these preference shareholders, it is reflected as cash outflow.

The cash flow from these activities will show the movement of the cash position of a business across the two periods.

The panel of service providers selected by is well versed in Singapore FRS and is able to prepare Cash Flow Statement which complies with Singapore FRS requirements. Please refer to Accounting Services for further information on the services offered.

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