The statement of cash flow is prepared as part of the financial statements
The statement of cash flow is prepared as part of the financial statements prepared by a company to demonstrate cash inflows and cash outflows for management to make crucial financial decisions. Operations of a company generate either cash or lead to spending of cash. There are, however, certain financial transactions that are not cash in nature but affect the profit of a company, for example, amortization and depreciation. Cash generating operations are classified in the cash flow statement as either operating, financing, or investing depending on their nature.
Classifications of activities
Below are the classifications as per our example:
- Issue of common stock for $2,500,000 and the issue of bonds worth $2,500,000- This item affects the cash flow statement as cash is received on the issue of common stock and issuance of bonds. It is classified as a financing activity in the cash flow statement as it is a transaction entered between the company and its investors to raise capital for the company. The acquisition of long-term liabilities also falls under this category of investing activities as capital is raised through long term funding. These two items will be reported as a positive figure since cash comes into the company.
- Purchasing production equipment whose value is estimated at $10,000,000- This item affects the cash flow statement as cash is paid out to acquire the equipment. This falls under the category of investing activities in the cash flow statement as it directly affects the value of the long-term assets of the company. This amount is to be disclosed as a negative figure in the statement of cash flow as cash is paid out.
In conclusion, the board of directors can make decisions on the activities to focus on to raise capital for the company once they are presented with the cash flow statement.