What is Statement of Cash Flow?
Cash flow is the amount of cash inflow and outflow from the cash account of an organization. It eliminated the non-cash transactions and only accounted for the cash transactions.
The cash flow is recorded in a specific report model which is term as a statement of cash flow. The statement is consist of three components naming
- Operating Activities
- Investing Activities
- Financing Activities
The changes in working capital are computed under the operating activities. Working capital includes accounts receivable, Accounts payable, and Inventory.
While the investing activities comprise of cash flow generated from the sale of fixed assets. And cash outflow for buying any fixed assets.
While the financing activities comprise cash inflow and outflow generated from the share capital and liabilities section of the balance sheet.
Methods For Preparing Statement of Cash Flow:
There are two methods used to prepare the statement of cash flow for any organization.
- Direct Method
- Indirect Method
The direct method is recommended by Financial Accounting Standards Board (FASB). The difference between the two methods lies only in the operating activities section while the other two sections are the same in the two sections.
Treatment Of Account Payable In The Statement of Cash Flow:
The account is used for recording the amount of money owed by the company’s suppliers to the company. In normal routine, the account is considered as the current liability of the company as it is due within one year.
Sometimes when it is specific that the amount due will be paid more than a one-year time span then it can be recorded under the head of long-term liabilities.
In the cash flow statement account payable is treated under the first component. We start the cash flow from the positive or negative net income. And then if there is an increase in the account payable during the time for which the cash flow statement is prepared.
The increase in account payable is always adds up with the net income we make from the company’s profit & loss, the logic behind this treatment is that credit sales occur during the financial year.
So that we exclude the amount that comes from net income comes due to net receivables and net sales.
Let’s have a look at the followings examples which will definitely help you to understand.
Analyze the following information of Desk Corporation and Make a cash flow statement.
Required: Full computation for the amount of Account payable is required.
Profit & Loss Statement
For Desk Corporation
For Desk Corporation
Computation For Account Payable Amount:
If we look at the balance sheet of the year 2017 the account payable is worth $35,000 while If we see on the balance of Account Payable at the year-end 2018 it increases to $70,000. It means that there is an increase in the amount of account payable.
Account Payable = $35,000-$70,000
Increase in Account Payable = $35,000. So it means that there are net amount credit sales for which we have not received any cash amount. So we will subtract it under the Operating Activities section. If the amount is of payable decreases, then it means that the organization received cash more related to sales.