Cash flow Statement is one of the financial statements needs to be submitted along with the balance sheet and profit and loss statement.
The are three components which make up the cash flow statement.
Cash flow from operating activities, cash flow from investing activities and cash flow from financing activities.
Cash spent in purchase or cash received from sale of fixed assets is an example of cash flow from investing activities.
Cash spent in purchase of equity or issue of debt, cash received from debt is an example of cash flow from financing activities.
All Cash spent and received in activities other then the financing and investing activities may be classified as cash flow from operations.
Depreciation expense is an expense which is provided for by the organization to account for the wear and tear of asset usage. However there is no cash out flow by depreciation expense. Hence any expense which is provided towards depreciation is added back to the cash flow statement.
Cash flow statement can be made in two different ways the direct method and the indirect method.
In the direct method each component of the income statement is adjusted to the cash spent/received. While in the indirect method, the net income is adjusted so arrive at the net cash flow.
However using both the methods, the direct and the indirect method the net cash flow would be the same irrespective of the method used to calculate the net cash flow.
Before we set out to prepare the cash flow statement, we know the net cash outflow or inflow, how? This is because the difference between the opening and closing cash balance would be the net cash flow that needs to be accounted for.
The purpose of the cash flow statement would be elaborate and break down the various activities that has resulted in the net cash inflow /outflow.