Determining the Cash Flow Statement

A company has two methods at its disposal, the indirect and the direct variant. With the direct method in particular, all cash flows must be recorded, categorised and accounted for. All account movements are offset against each other until the annual result has been determined.

The direct method is very informative because only relevant values are used from the beginning. A second possibility is to prepare the cash flow statement according to the indirect method. In this case, the already determined result of the profit and loss account is used and adjusted for all non-relevant amounts. Thus, for example, depreciation or provisions are removed from the annual profit or loss. The indirect method contains fewer details and is therefore preferred by companies. As a result, the competition receives less data than with the direct method, which partly works with confidential business transactions.

Read out the cash flow statement

After the cash flow statement has been prepared, it must be interpreted. It is looked at in which areas the cash inflows and outflows took place. A negative total cash flow is not a cause for concern. Rather, the operating cash flow should be looked at first. If this is positive, the core business was profitable in the period under consideration.

This is the basis for further business operations. If there is a negative result in the investing cash flow, this can also be an advantage because, for example, forward-looking decisions were made. The situation is similar with a negative investing cash flow in mt4 from Exness. This can come about because loans were repaid, which would be a positive business transaction. The figures in the cash flow statement are therefore less meaningful when viewed in isolation. However, a closer look quickly reveals how a company is positioned economically.

Income and expenses in the definition

In order to be able to draw up the cash flow statement, it must first be clear which items influence the capital and which only exist on paper. Here, the concept of income must be compared with incoming payments and the concept of expenses with outgoing payments. An income increases the profit of the enterprise. There is an entry in the profit and loss account, but it does not affect payments. There is no movement in the company's bank.

A write-up on fixed assets, for example, is posted in the business accounts but cannot be traced in the bank account. This is only the case with a deposit. Here, funds actually flow to the company when, for example, a customer has paid his invoice. The same applies to expenses and disbursements. A provision for future investments has no effect on the bank account, which is why it is an expense. A payment of a customer's invoice, on the other hand, reduces the money supply and is a disbursement. Income and expenses are not relevant for the preparation of the cash flow statement.

Direct Method

To prepare the direct method of a cash flow statement, a company must list all its cash flows. Normally, financial accounting and controlling work together in this case and analyse the data. The sum of all cash income is subtracted from the sum of cash expenses. As already noted, in most cases the cash flow statement is divided into three parts.

In a first step, the operating cash flow is determined. This provides information about which receipts and payments were made with the core operating business of the company. The operating cash flow is often seen as the most important part of the cash flow statement, as it measures the profitability of the actual business idea.