“Cash is king”… yes, I am sure we are all familiar, if not bored of hearing the same line that seems to circle its way around every finance department. Truth is, cash is in fact, the lifeblood of any business, without it no there is no way a company would be able to survive within their market.
Cash cycle begins with sourcing raw materials, and transforming them into good for products. These are then usually sold on credit, once the money is received suppliers will be paid. This whole process needs to be managed very carefully otherwise, delayed monies from credit customers will affect a ‘business’ ability to pay suppliers who may then only supply on a cash demand basis.
It’s important to remember that profit will not equal cash/ bank balance as per the Statement of Financial Position. This is due to the accruals concept which results in accruals and repayments, along with non- cash items such as depreciation.
The preparation of a statement of cash flow indicates flows of “cash in” and “cash out”. Statements of cash flows should comply with IAS 7 statement of Cash Flows. Download our free template below.
Before attempting to prepare a cash flow you should be comfortable with the following concept as the format. Since the main objective of IAS7 is:
“To require the provision of information about the historical changes in cash and cash equivalents of an entity. Achieved by means of a statement of cash flows which classifies cash flows during the period from operating, investing and financing activities”.
To calculate free Cash Flow from a cash flow statement, you’ll need to find the item cash flow from operations. This is also referred to as (“operating cash” or “net cash from operating activities”) and subtract capital expenditure required for current operations from it. The Free Cash Flow formula is:
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