What is a Cash Flow Statement?
The Cash Flow Statement allows us to understand the movements of cash during a given period (for example over a month, quarter, or year). It is divided into three flows:
Operating Activities: This section analyzes the cash generated (or used) by the company’s business activities (sales of goods or services, purchases, salaries, etc.)
Investing Activities: This section primarily analyzes the cash invested in acquiring new assets (tangible, intangible, equity investments) or generated from the sale of assets
Financing Activities: This section analyzes the cash used or generated by cash movements related to shareholders (including dividends paid) as well as the financing flows from third parties (mainly banks)
At the end of the Cash Flow Statement, it is necessary to reconcile the cash at the beginning and end of the period.
Direct Method or Indirect Method?
The operating activities can be prepared using two different methods:
Direct: In this method, movements are directly allocated to each type of transaction (e.g., customer payments, supplier payments, employee payments)
Indirect: In this method, the cash flow is calculated starting from the net income, to which non-cash items and changes in working capital (e.g., accounts receivable, inventory, accounts payable) must be added or deducted
In practice, it is common to use the indirect method.
Example – Cash Flow – Indirect Method
The following example illustrates how a Cash Flow Statement is prepared using the indirect method. This example includes the most common positions and transactions of a company and can be completed with additional transactions (e.g., intangible assets, capital increases).
To prepare the Cash Flow Statement, it is not only necessary to use variations that are directly visible in the balance sheet (e.g., accounts receivable, accounts payable), but also to use positions that are visible in the fixed asset and equity tables. Therefore, it is necessary to prepare these tables as well.
Balance sheet | 31.12.2024 | 31.12.2023 | Variation | |
| Cash and cash equivalents | 330 | 370 | -40 | |
| Accounts receivables | 50 | 70 | -20 | C |
| Inventory | 70 | 80 | -10 | D |
| Prepaid expenses and accrued income | 20 | 25 | -5 | E |
Total Current assets | 470 | 545 | ||
| Fixed assets | 900 | 700 | ||
Total Non-current assets | 900 | 700 | ||
Total Assets | 1’370 | 1’245 | ||
| Accounts payables | 60 | 40 | 20 | F |
| Deferred income and accrued expenses | 15 | 20 | -5 | G |
Total Current liabilities | 75 | 60 | ||
| Non-current financial liabilities | 400 | 500 | -100 | J |
Total Non-current liabilities | 400 | 500 | ||
| Share capital | 100 | 100 | ||
| Statutory capital reserves | 50 | 50 | ||
| Retained earnings | ||||
| – Profit carried forward | 465 | 200 | ||
| – Annual profit | 280 | 335 | ||
Total Equity | 895 | 685 | ||
Total Liabilities and Equity | 1’370 | 1’245 |
Income Statement | 2024 | |
| Sales | 2’000 | |
| Costs (materials, employees, other) | -1’500 | |
| Depreciation and impairments | -100 | B |
| Interests | -20 | |
| Taxes | -100 | |
Net profit | 280 | A |
Changes in Fixed assets | 2024 | |
| Fixed assets at 01.01. | 700 | |
| Acquisitions | 300 | H |
| Depreciation | -100 | |
Fixed assets at 31.12. | 900 |
Changes in Equity | Share capital | Statutory capital reserves | Retained earnings | Total | |
| Equity at 01.01.2024 | 100 | 50 | 535 | 685 | |
| Dividend | -70 | -70 | I | ||
| Net profit | 280 | 280 | |||
Equity at 31.12.2024 | 100 | 50 | 745 | 895 |
Cash Flow Statement | 2024 | |
A | Net profit | 280 |
B | Depreciation and impairments | 100 |
C | Changes in accounts receivables | 20 |
D | Changes in inventory | 10 |
E | Changes in prepaid expenses and accrued income | 5 |
F | Changes in accounts payables | 20 |
G | Changes in deferred income and accrued expenses | -5 |
Sum A to G = X | Cash flow from operating activities | 430 |
H | Investments in fixed assets | -300 |
Sum H = Y | Cash flow from investing activities | -300 |
I | Dividend | -70 |
J | Reimbursment of loan | -100 |
Sum I to J = Z | Cash flow from financing activities | -170 |
X+Y+Z = | Change in cash and cash equivalents | -40 |
| Cash and cash equivalents at 01.01. | 370 | |
| Change in cash and cash equivalents | -40 | |
Cash and cash equivalents at 31.12. | 330 |
In the above example, we can observe that the change in cash (a decrease of 40 during the year 2024) consists of positive cash flows from operating activities of 430, cash flows from investing activities of -300, and cash flows from financing activities of -170.
Additional Information:
We are at your disposal for any further information. If you need help setting up the cash flow statement, don’t hesitate to contact us and we will be pleased to analyze your situation together. Contact us: https://www.gaapex.ch/contact/
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