The cash flow statement records your inflows and outflows of cash.

You’ve surely heard this term before the cash flow statement.

But what is it? Well, it’s a simple accounting document that records inflows and outflows of cash.

It’s important to have one of these statements in addition to an income statement since there’s often a lapse between when an income or expense item is recorded and when the cash actually moves in or out of your accounts.

Imagine your company performs a marketing service in June, but the client doesn’t pay until the beginning of July.

That sale would appear in both your P&L statement and your balance sheet as early as June, but since the actual payment won’t arrive in your bank account until July, you wouldn’t include it on June’s cash flow statement.

All cash flow statements are separated into three categories: operating activities, investing activities and financing activities.

Section 1. Operating activities

This section covers transactions that would be included in the net income portion of the income statement.

That includes sales to customers, payments to employees and suppliers, tax payments and so on.

Section 2. Investing activities

This section includes cash movements related to investments and capital assets (i.e. assets which last longer than 1 year).

So this part of the cash flow statement records the cash spent on or received from the purchase or sale of financial securities like stocks and bonds, and the cash spent on or received from the purchase or sale of property, factories and equipment.

Section 3. Financing activities

Lastly, this section is related to money that comes from or goes to company owners and creditors.

That includes dividends paid to shareholders and borrowings.

Once you’ve recorded all of the relevant cash movements pertaining to these 3 categories, you would combine them to calculate your net increase in cash.

And that’s how you get a cash flow statement.

The cash flow statement is important because it tells you when you’re actually going to run out of money.

Leave us a message if you need help with your cash flow statement.

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