20241102170900-Components_of_a_Cash_Flow_Statement

Components of a Cash Flow Statement

While profit and loss accounts and balance sheets have been covered:

From “An Introduction to the Cash Flow Statement¨ in Accounting and Finance for Managers

[…] the financial picture is not quite complete since we have not yet drawn attention to cash flows or the cash effects of the various transactions carried out by the business. […] A cash flow statement focuses on these matters by presenting information from both the balance sheet and the profit and loss account in a different way. The objective is to explain how cash, bank balances and borrowings have changed during a particular period […]

Notably, then, the cash flow statement is meant to demonstrate the cash effects of activity recorded in the profit and loss accounts and the balance sheet for the same or a similar period in time. Thus, it uses the same data, but organizes that information differently.

After all, since (Kind 1999, 20-21):

From “An Introduction to the Cash Flow Statement¨ in Accounting and Finance for Managers

There are timing differences between the recognition of revenues and the receipt of cash, and the recognition of costs and the payment of cash.

It can be said that while (Kind 1999, 20):

From “An Introduction to the Cash Flow Statement¨ in Accounting and Finance for Managers

[b]eing profitable helps cash flow, […] it is not the same as cash flow.

Nonetheless, operating profits, just like issued share capital, together comprising shareholder equity, is a source of cash, as are unpaid bills (i.e., cash that is owed insofar as this is acting as credit) (Kind 1999, 20-21).

Cash sources are operating profits, issued share capital, and unpaid bills

Wherein cash source is $M_r$, operating profit is $P_o$, and share capital is $S$, and unpaid bills are $O$:

$$M_r=P_o+S+O$$

Meanwhile, the uses of cash consists in operating expenses, pre-payments, and other payments owed for given invoiced sales or services (Kind 1999, 21). Pre-payments are payments made in advance, before a transaction has or can be cleared (Ibid).

Cash uses are operating expenses, pre-payments, and cash not yet received

Wherein cash use is $M_c$, operating expense is $C_o$, pre-payments are $C_p$, and cash not yet received is $R_a$:

$$M_c=C_o+C_p+R_a$$

The cash flow statements can therefore be reduced to two broad abstract quantities that are being tracked:

• Cash sources, i.e. avenues which provide frequent short-term or medium-term revenue
• Cash uses, i.e. avenues which act as frequent short-term or medium-term costs For purposes of subtraction:

$$M_p=M_r-M_c$$

Wherein the resulting $M_p$ is the cash profit, or monetary profit.

Cash flow as measured by monetary/cash profit

Monetary or cash profit is still not itself realized profit although it is related to it. The cash profit or monetary profit clearly tracks the circulation of profit for or in the given firm–that is, it takes a snapshot of the passage from unrealized to realized profit and back.

Margin of firm growth

Because cash profit or monetary profit simply takes a snapshot of the cash flow, or the process of profit realization, it could be used to figure out the “margin of growth¨ of or for the firm.

Given the similarity of the central formula, despite the specificity of its terms, a cash flow statement can be treated as a subcategory of the profit and loss statement.

cash_flow cash_flow_statement balance_sheet profit_and_loss_account profit_and_loss_statement share_capital shareholder_equity operating_expenses operating_costs issued_share_capital operating_profit profit_realization cash_flow finance mathematics mathematical_operator mathematical_operators binary_operators binary_operator sum difference addition subtraction addition_operator addition_operator addition_operators subtraction_operator subtraction_operators equality math

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bibliography

• “An Introduction to the Cash Flow Statement.” In Accounting and Finance for Managers. The Fast Track MBA Series. Dover, NH: PriceWaterhouseCoopers, 1999.