Cash flow is the movement of cash into or out of a business, project, or financial product.

(Note that "cash" is used here in the broader sense of the term, where it includes bank
deposits.) It is usually measured during a specified, finite period of time. Measurement of
cash flow can be used for calculating other parameters that give information on a
company's value and situation. Cash flow can e.g. be used for calculating parameters:

• to determine a project's rate of return or value. The time of cash flows into and out
of projects are used as inputs in financial models such as internal rate of return
and net present value.
• to determine problems with a business's liquidity. Being profitable does not
necessarily mean being liquid. A company can fail because of a shortage of cash
even while profitable.
• as an alternative measure of a business's profits when it is believed that accrual
accounting concepts do not represent economic realities. For example, a company
may be notionally profitable but generating little operational cash (as may be the
case for a company that barters its products rather than selling for cash). In such a
case, the company may be deriving additional operating cash by issuing shares or
raising additional debt finance.
• cash flow can be used to evaluate the 'quality' of income generated by accrual
accounting. When net income is composed of large non-cash items it is
considered low quality.
• to evaluate the risks within a financial product, e.g. matching cash requirements,
evaluating default risk, re-investment requirements, etc.

Cash flow is a generic term used differently depending on the context. It may be defined
by users for their own purposes. It can refer to actual past flows or projected future flows.
It can refer to the total of all flows involved or a subset of those flows. Subset terms
include net cash flow, operating cash flow and free cash flow.

Contents
[hide]

• 1 Statement of cash flow in a business's financials

• 2 Ways Companies Can Augment Reported Cash Flow
• 3 Examples
• 4 See also
• 5 References

• 6 External links

[edit] Statement of cash flow in a business's financials

The (total) net cash flow of a company over a period (typically a quarter or a full year) is
equal to the change in cash balance over this period: positive if the cash balance increases
(more cash becomes available), negative if the cash balance decreases. The total net cash
flow is the sum of cash flows that are classified in three areas:

1. Operational cash flows: Cash received or expended as a result of the company's

internal business activities. It includes cash earnings plus changes to working
capital. Over the medium term this must be net positive if the company is to
remain solvent.
2. Investment cash flows: Cash received from the sale of long-life assets, or spent on
capital expenditure (investments, acquisitions and long-life assets).
3. Financing cash flows: Cash received from the issue of debt and equity, or paid out
as dividends, share repurchases or debt repayments.

[edit] Ways Companies Can Augment Reported Cash

Flow
Common methods include:

• Sales - Sell the receivables to a factor for instant cash. (leading)

• Inventory - Don't pay your suppliers for an additional few weeks at period end.
(lagging)
• Sales Commissions - Management can form a separate (but unrelated) company
and act as its agent. The book of business can then be purchased quarterly as an
investment.
• Wages - Remunerate with stock options.
• Maintenance - Contract with the predecessor company that you prepay five years
worth for them to continue doing the work
• Equipment Leases - Buy it
• Rent - Buy the property (sale and lease back, for example).
• Oil Exploration costs - Replace reserves by buying another company's.
• Research & Development - Wait for the product to be proven by a start-up lab;
then buy the lab.
• Consulting Fees - Pay in shares from treasury since usually to related parties
• Interest - Issue convertible debt where the conversion rate changes with the
unpaid interest.
• Taxes - Buy shelf companies with TaxLossCarryForward's. Or gussy up the
purchase by buying a lab or O&G explore co. with the same TLCF.[1]
[edit] Examples
Description Amount ($) totals ($)
Cash flow from operations +10
Sales (paid in cash) +30
Materials -10
Labor -10
Cash flow from financing +40
Incoming loan +50
Loan repayment -5
Taxes -5
Cash flow from investments -10
Purchased capital -10
Total +40

The net cash flow only provides a limited amount of information. Compare, for example,
the cash flows over three years of two companies:

Company A Company B
Year 1 Year 2 year 3 Year 1 Year 2 year 3
Cash flow from operations +20M +21M +22M +10M +11M +12M
Cash flow from financing +5M +5M +5M +5M +5M +5M
Cash flow from investment -15M -15M -15M 0M 0M 0M
Net cash flow +10M +11M +12M +15M +16M +17M

Company B has a higher yearly cash flow. However, Company A is actually earning
more cash by its core activities and has already spent 45M in long term investments, of
which the revenues will only show up after three years.

[edit] See also

• Cash flow hedge
• Cash flow projection
• Cash flow statement
• Internal rate of return
• Net present value
• Return of capital
In financial accounting, a cash flow statement, also known as statement of cash flows or
funds flow statement,[1] is a financial statement that shows how changes in balance sheet
accounts and income affect cash and cash equivalents, and breaks the analysis down to
operating, investing, and financing activities. Essentially, the cash flow statement is
concerned with the flow of cash in and cash out of the business. The statement captures
both the current operating results and the accompanying changes in the balance sheet.[1]
As an analytical tool, the statement of cash flows is useful in determining the short-term
viability of a company, particularly its ability to pay bills. International Accounting
Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow
statements.

People and groups interested in cash flow statements include:

• Accounting personnel, who need to know whether the organization will be able to
cover payroll and other immediate expenses
• Potential lenders or creditors, who want a clear picture of a company's ability to
repay
• Potential investors, who need to judge whether the company is financially sound
• Potential employees or contractors, who need to know whether the company will
be able to afford compensation
• Shareholders of the business.

Contents
[hide]

• 1 Purpose
• 2 History & variations
• 3 Cash flow activities
o 3.1 Operating activities
o 3.2 Investing activities
o 3.3 Financing activities
• 4 Disclosure of non-cash activities
• 5 Preparation methods
o 5.1 Direct method
o 5.2 Indirect method
 5.2.1 Rules (Operating Activities)
 5.2.2 Rules (Financing Activities)
• 6 See also

• 7 Notes and references

[edit] Purpose
Statement of Cash Flow - Simple Example
 for the period 01/01/2006 to 12/31/2006
Cash flow from operations Rs.4,000
Cash flow from investing Rs.(1,000)
Cash flow from financing Rs.(2,000)
Net cash flow Rs.1,000
Parentheses indicate negative values

The cash flow statement was previously known as the flow of Cash statement.[2] The
cash flow statement reflects a firm's liquidity.

The balance sheet is a snapshot of a firm's financial resources and obligations at a single
point in time, and the income statement summarizes a firm's financial transactions over
an interval of time. These two financial statements reflect the accrual basis accounting
used by firms to match revenues with the expenses associated with generating those
revenues. The cash flow statement includes only inflows and outflows of cash and cash
equivalents; it excludes transactions that do not directly affect cash receipts and
payments. These non-cash transactions include depreciation or write-offs on bad debts or
credit losses to name a few.[3] The cash flow statement is a cash basis report on three
types of financial activities: operating activities, investing activities, and financing
activities. Non-cash activities are usually reported in footnotes.

The cash flow statement is intended to[4]

1. provide information on a firm's liquidity and solvency and its ability to change
cash flows in future circumstances
2. provide additional information for evaluating changes in assets, liabilities and
equity
3. improve the comparability of different firms' operating performance by
eliminating the effects of different accounting methods
4. indicate the amount, timing and probability of future cash flows

The cash flow statement has been adopted as a standard financial statement because it
eliminates allocations, which might be derived from different accounting methods, such
as various timeframes for depreciating fixed assets.[5]

[edit] History & variations

Cash basis financial statements were very common before accrual basis financial
statements. The "flow of funds" statements of the past were cash flow statements.

In 1863, the Dowlais Iron Company had recovered from a business slump, but had no
cash to invest for a new blast furnace, despite having made a profit. To explain why there
were no funds to invest, the manager made a new financial statement that was called a
comparison balance sheet, which showed that the company was holding too much
inventory. This new financial statement was the genesis of Cash Flow Statement that is
used today.[6]

In the United States in 1971, the Financial Accounting Standards Board (FASB) defined
rules that made it mandatory under Generally Accepted Accounting Principles (US
GAAP) to report sources and uses of funds, but the definition of "funds" was not
clear."Net working capital" might be cash or might be the difference between current
assets and current liabilities. From the late 1970 to the mid-1980s, the FASB discussed
the usefulness of predicting future cash flows.[7] In 1987, FASB Statement No. 95 (FAS
95) mandated that firms provide cash flow statements.[8] In 1992, the International
Accounting Standards Board issued International Accounting Standard 7 (IAS 7), Cash
Flow Statements, which became effective in 1994, mandating that firms provide cash
flow statements.[9]

US GAAP and IAS 7 rules for cash flow statements are similar, but some of the
differences are:

• IAS 7 requires that the cash flow statement include changes in both cash and cash
equivalents. US GAAP permits using cash alone or cash and cash equivalents.[5]
• IAS 7 permits bank borrowings (overdraft) in certain countries to be included in
cash equivalents rather than being considered a part of financing activities.[10]
• IAS 7 allows interest paid to be included in operating activities or financing
activities. US GAAP requires that interest paid be included in operating activities.
[11]

• US GAAP (FAS 95) requires that when the direct method is used to present the
operating activities of the cash flow statement, a supplemental schedule must also
present a cash flow statement using the indirect method. The IASC strongly
recommends the direct method but allows either method. The IASC considers the
indirect method less clear to users of financial statements. Cash flow statements
are most commonly prepared using the indirect method, which is not especially
useful in projecting future cash flows.

[edit] Cash flow activities

The cash flow statement is partitioned into three segments, namely: cash flow resulting
from operating activities, cash flow resulting from investing activities, and cash flow
resulting from financing activities.

The money coming into the business is called cash inflow, and money going out from the
business is called cash outflow.

[edit] Operating activities

Operating activities include the production, sales and delivery of the company's product
as well as collecting payment from its customers. This could include purchasing raw
materials, building inventory, advertising, and shipping the product.
Under IAS 7, operating cash flows include:[11]

• Receipts from the sale of goods or services

• Receipts for the sale of loans, debt or equity instruments in a trading portfolio
• Interest received on loans
• Dividends received on equity securities
• Payments to suppliers for goods and services
• Payments to employees or on behalf of employees
• Interest payments (alternatively, this can be reported under financing activities in
IAS 7, and US GAAP)

Items which are added back to [or subtracted from, as appropriate] the net income figure
(which is found on the Income Statement) to arrive at cash flows from operations
generally include:

• Depreciation (loss of tangible asset value over time)

• Deferred tax
• Amortization (loss of intangible asset value over time)
• Any gains or losses associated with the sale of a non-current asset, because
associated cash flows do not belong in the operating section.(unrealized
gains/losses are also added back from the income statement)

[edit] Investing activities

Examples of Investing activities are

• Purchase or Sale of an asset (assets can be land, building, equipment, marketable

securities, etc.)
• Loans made to suppliers or received from customers
• Payments related to mergers and acquisitions

[edit] Financing activities

Financing activities include the inflow of cash from investors such as banks and
shareholders, as well as the outflow of cash to shareholders as dividends as the company
generates income. Other activities which impact the long-term liabilities and equity of the
company are also listed in the financing activities section of the cash flow statement.

Under IAS 7,

• Proceeds from issuing short-term or long-term debt

• Payments of dividends
• Payments for repurchase of company shares
• Repayment of debt principal, including capital leases
• For non-profit organizations, receipts of donor-restricted cash that is limited to
long-term purposes
Items under the financing activities section include:

• Dividends paid
• Sale or repurchase of the company's stock
• Net borrowings
• Payment of dividend tax

[edit] Disclosure of non-cash activities

Under IAS 7, non-cash investing and financing activities are disclosed in footnotes to the
financial statements. Under US General Accepted Accounting Principles (GAAP), non-
cash activities may be disclosed in a footnote or within the cash flow statement itself.
Non-cash financing activities may include[11]

• Leasing to purchase an asset

• Converting debt to equity
• Exchanging non-cash assets or liabilities for other non-cash assets or liabilities
• Issuing shares in exchange for assets

[edit] Preparation methods

The direct method of preparing a cash flow statement results in a more easily understood
report.[12] The indirect method is almost universally used, because FAS 95 requires a
supplementary report similar to the indirect method if a company chooses to use the
direct method.

[edit] Direct method

The direct method for creating a cash flow statement reports major classes of gross cash
receipts and payments. Under IAS 7, dividends received may be reported under operating
activities or under investing activities. If taxes paid are directly linked to operating
activities, they are reported under operating activities; if the taxes are directly linked to
investing activities or financing activities, they are reported under investing or financing
activities.

Sample cash flow statement using the direct method[13]

Cash flows from (used in) operating activities

Cash receipts from customers 9,500
Cash paid to suppliers and employees (2,000)
Cash generated from operations (sum) 7,500
Interest paid (2,000)
Income taxes paid (3,000)
Net cash flows from operating activities 2,500
Cash flows from (used in) investing activities
Proceeds from the sale of equipment 7,500
Dividends received 3,000
Net cash flows from investing activities 10,500
Cash flows from (used in) financing activities
Dividends paid (2,500)
Net cash flows used in financing activities (2,500)
.
Net increase in cash and cash equivalents 10,500
Cash and cash equivalents, beginning of year 1,000
Cash and cash equivalents, end of year $11,500

[edit] Indirect method

The indirect method uses net-income as a starting point, makes adjustments for all
transactions for non-cash items, then adjusts from all cash-based transactions. An
increase in an asset account is subtracted for net income, and an increase in a liability
account is added back to net income. This method converts accrual-basis net income (or
loss) into cash flow by using a series of additions and deductions.[14]

[edit] Rules (Operating Activities)

To Find Cash Flows
from Operating Activities
using the Balance Sheet and Net Income
For Increases in Net Inc Adj
Current Assets (Non-Cash) Decrease
Current Liabilities Increase
For All Non-Cash...
*Expenses (Decreases in Fixed Assets) Increase
*Non-cash expenses must be added back to NI. Such expenses may be represented on
the balance sheet as decreases in long term asset accounts. Thus decreases in fixed
assets increase NI.

The following rules can be followed to calculate Cash Flows from Operating Activities
when given only a two year comparative balance sheet and the Net Income figure. Cash
Flows from Operating Activities can be found by adjusting Net Income relative to the
change in beginning and ending balances of Current Assets, Current Liabilities, and
sometimes Long Term Assets. When comparing the change in long term assets over a
year, the accountant must be certain that these changes were caused entirely by their
devaluation rather than purchases or sales (ie they must be operating items not providing
or using cash) or if they are nonoperating items.[15]

• Decrease in non-cash current assets are added to net income

• Increase in non-cash current asset are subtracted from net income
 • Increase in current liabilities are added to net income
• Decrease in current liabilities are subtracted from net income
• Expenses with no cash outflows are added back to net income (depreciation
and/or amortization expense are the only operating items that have no effect on
cash flows in the period)
• Revenues with no cash inflows are subtracted from net income
• Non operating losses are added back to net income
• Non operating gains are subtracted from net income

The intricacies of this procedure might be seen as,

For example, consider a company that has a net income of Rs.100 this year, and its A/R
increased by Rs.25 since the beginning of the year. If the balances of all other current
assets, long term assets and current liabilities did not change over the year, the cash flows
could be determined by the rules above as Rs.100 – Rs.25 = Cash Flows from Operating
Activities = Rs.75. The logic is that, if the company made Rs.100 that year (net income),
and they are using the accrual accounting system (not cash based) then any income they
generated that year which has not yet been paid for in cash should be subtracted from the
net income figure in order to find cash flows from operating activities. And the increase
in A/R meant that Rs.25 of sales occurred on credit and have not yet been paid for in
cash.

In the case of finding Cash Flows when there is a change in a fixed asset account, say the
Buildings and Equipment account decreases, the change is subtracted from Net Income.
The reasoning behind this is that because Net Income is calculated by, Net Income = Rev
- Cogs - Depreciation Exp - Other Exp then the Net Income figure will be decreased by
the building's depreciation that year. This depreciation is not associated with an exchange
of cash, therefore the depreciation is added back into net income to remove the non-cash
activity.

[edit] Rules (Financing Activities)

Finding the Cash Flows from Financing Activities is much more intuitive and needs little
explanation. Generally, the things to account for are financing activities:

• Include as outflows, reductions of long term notes payable (as would represent the
cash repayment of debt on the balance sheet)
• Or as inflows, the issuance of new notes payable
• Include as outflows, all dividends paid by the entity to outside parties
• Or as inflows, dividend payments received from outside parties
• Include as outflows, the purchase of notes stocks or bonds
• Or as inflows, the receipt of payments on such financing vehicles.[citation needed]
In the case of more advanced accounting situations, such as when dealing with
subsidiaries, the accountant must

• Exclude intra-company dividend payments.

• Exclude intra-company bond interest.[citation needed]

A traditional equation for this might look something like,

Example: cash flow of XYZ:[16][17][18]

XYZ co. Ltd. Cash Flow Statement

(all numbers in millions of Rs.)
Period ending 03/31/2010 03/31/2009 03/31/2008
Net income 21,538 24,589 17,046
Operating activities, cash flows provided by or used in:
Depreciation and amortization 2,790 2,592 2,747
Adjustments to net income 4,617 621 2,910
Decrease (increase) in accounts receivable 12,503 17,236 --
Increase (decrease) in liabilities (A/P, taxes payable) 131,622 19,822 37,856
Decrease (increase) in inventories -- -- --
Increase (decrease) in other operating activities (173,057) (33,061) (62,963)
Net cash flow from operating activities 13 31,799 (2,404)
Investing activities, cash flows provided by or used in:
Capital expenditures (4,035) (3,724) (3,011)
Investments (201,777) (71,710) (75,649)
Other cash flows from investing activities 1,606 17,009 (571)
Net cash flows from investing activities (204,206) (58,425) (79,231)
Financing activities, cash flows provided by or used in:
Dividends paid (9,826) (9,188) (8,375)
Sale (repurchase) of stock (5,327) (12,090) 133
Increase (decrease) in debt 101,122 26,651 21,204
Other cash flows from financing activities 120,461 27,910 70,349
Net cash flows from financing activities 206,430 33,283 83,311
Effect of exchange rate changes 645 (1,840) 731
Net increase (decrease) in cash and cash
2,882 4,817 2,407
equivalents

[edit] See also

• Cash flow
• Income statement
• Balance sheet
• Statement of retained earnings (statement of changes in equity)