The changes made to the Act on Accounting brought with itself the obligation for small and medium accounting entities to put together and publish cash flow statements as an obligatory part of their financial statements. Not only accountants are a little hesitant when it comes to this, if not hostile. Their reasoning might be that unlike the balance sheet or the profit and loss statement, this statement won’t be generated by a software automatically, not even a concept of such a statement, and the accountant has to do it manually when compiling financial statements. Let us look at what information can be gained from such a statement and let’s hope that the benefits will in time overpower the hostility.

All of the statements that are a part of the financial statement have their purpose and play an irreplaceable role in providing information which cannot be gained from other statements. For example the profit and loss statement provides more detail on one single line in the balance sheet, namely the economic result for the current period.

So what additional information can be found in the cash flow statement? Firstly, its undisputable advantage is that the information it contains is not influenced by the management like for example the time for depreciations of fixed assets is, or the creation of correctional entries in the profit and loss statement. The cash flow statement basically summarizes transfers made on bank accounts of the accounting entity and analyzes the difference between the initial and final account balance (from the balance sheet) and provides details on where the accounting entity made the money and where the money was spent and for what. The cash flow statement consists of three parts: operational, investment, and financial activities.

The part concerned with operational activities includes cash flow linked to the main activity of the accounting entity – income from sale of services, products, or goods, and expenses linked to the realization of these sales (purchases of supplies, employee salaries, payments to service provides etc.). In practice, it is often quite difficult to acquire this information and that’s why the operational part of the cash flow statement is regularly compiled indirectly, that means that before tax deduction, sales are reduced of items that are of a non-monetary nature or are not part of the operational activity.

In the investment part we can find cash flow related to sales and purchases of fixed assets.

And finally, the financial activities include cash flow related to drawdowns and payments of credit, decrease or increase of the capital, and profit-sharing payments.

How can one interpret information included in this kind of a statement? From a long-term point of view, a company that is doing well should show positive cash flow in the operational part and the money made should be invested further which creates negative cash flow in the investment part. If an accounting entity generates negative cash flow in the operational activities part and at the same time positive cash flow in the investment activities part, it means that lack of operational finances is being saved by sales of assets. This situation is obviously not a long-term solution and information like this cannot be seen neither in the balance sheet, nor in the profit and loss statement, especially if it is purposely compiled in segments.

Written by: Alice Šrámková

Edited by: Klára Honzíková