Preparing the statement of cash flow
The cash flow statement has four purposes: 1.To predicts future cash flow. 2. Evaluate management decisions. 3. Determine the company’s ability to pay dividends to shareholders and the payments to creditors. 4. Show the relationship of net income for the company’s cash flows. With the cash receipts and the cash payments, the cash flow statement can analyze the cash flow of a company. The majority of the company’s out there use the indirect method and then there is the direct method. The business activities that companies engage in are operating, investing and financing activities. The operating activities create revenues, expenses, gains and losses. With the indirect method reconciles from net income to net cash. The investing increases and decreases long term assets and the financing activities show how cash was obtained from investors and creditors. Some items are added and some are subtracted when using the indirect method. The equation to figure this out is:
Cash revenue-cash expense=net income-non cash revenue-gain+non-cash expense + loss
With the direct method for operating activities cash receipts of interest, dividends, cash from customers, payments to suppliers, employee payments, payments for interest expense and income tax expense. Financing activities is purchases of capital assets, investments and making loans to another company and selling capital. Also, proceeds from insurance of shares and debt, payments of debt and repurchases of a company’s own shares, payment of dividends are taken into account. Cash is measured by free cash flow, with is the amount of cash available from operations after payments. This is the equation:
Free cash flow=net cash from operating activities-cash outflow earmarked for investments in plant, equipment, and other long term assets.