Cash Flow Statement: Concept, Meaning, Principles, and How to Prepare It Under Circular 200

Vũ Khôi

Author at Wotech Electronics Blog

The cash flow statement is one of the four basic financial statements, alongside the Balance Sheet, the Income Statement, and the Statement of Changes in Equity. It helps managers control a company's cash flows. It is therefore a very important task that demands accuracy and full compliance with accounting standards.

SimERP will share the concept, purpose, and a roundup of the principles. In addition, the article shows how to prepare a cash flow statement in the most compliant way with Circular 200.

What is the cash flow statement?

Definition

The cash flow statement, also known as the statement of cash flows, presents the cash inflows and cash outflows of a business over a given period. From it, managers can assess and control cash flows, and it also helps the business evaluate how effectively those flows are being used.

The cash flow statement consists of 2 basic parts:

Cash inflows:

• Customer payments for goods or services

• Bank deposit interest

• Savings interest, investment returns

• Investment from shareholders

Cash outflows:

• Costs of purchasing shares, goods, raw materials, and tools for production and business

• Payroll costs, facility rent, and daily operating expenses

• Purchases of fixed assets (for example, machinery, office equipment, etc.)

• Return distributions

• Corporate income tax, personal income tax, value-added tax, and other taxes and fees

Based on business activity, cash flows can be classified as follows:

• Operating activities: includes cash inflows and outflows related to producing and selling the company's goods and services

• Investing activities: includes cash inflows and outflows related to investing in and liquidating assets and long-term financial investments

• Financing activities: includes cash inflows and outflows related to raising capital from owners and creditors, repaying creditors, paying dividends to shareholders, distributing returns to investors, and buying back shares

Meaning of the cash flow statement

The cash flow statement is a key foundation of corporate financial management. It provides information on the sources, purposes, and amounts the business has received and spent during the period, showing the relationship between net cash flow and profit — where net cash flow reflects the difference between cash inflows and outflows, and profit reflects the difference between revenue and expenses.

Through the cash flow statement, managers can assess the company's ability to generate cash internally and externally, as well as its ability to repay debts on time. It is also an important basis for forecasting the company's future cash flows.

Guide to the cash flow statement under Circular 200

Principles for preparing the cash flow statement

The cash flow statement is one component of a company's financial statements. It is a mandatory financial statement prepared at the end of each fiscal year. Under Circular No. 200/2014/TT-BTC (Circular 200) of the Ministry of Finance, there are 2 methods for preparing the cash flow statement: direct and indirect. Preparing the statement under each method must follow these principles:

Direct method cash flow statement

Presents and determines the cash inflows and outflows of operating activities by directly analyzing and consolidating receipts and payments item by item, based on the company's general and detailed accounting ledgers.

Advantages

• Directly presents information on cash received/paid from operating activities

Disadvantages:

• Does not show the relationship between operating results and the cash flow results of those operations

• Figures are harder to verify and reconcile than those in other types of reports

Line items for preparing the statement:

• Cash received from sales of goods, service provision, and other revenue (Code 01): Debit balances of accounts 111, 112 corresponding to the credit side of accounts 511, 131, 3331, 515, 121…

• Cash paid to suppliers of goods and services (Code 02): Credit balances of accounts 111, 112 corresponding to the debit side of accounts 331, 131, 152, 156, 138, 153, 154, 621, 642, 641, 632, 338, 242.

• Cash paid to employees (Code 03): Credit balances of accounts 111, 112 corresponding to account 334.

• Interest paid on borrowings (Code 04): Credit side of accounts 111, 112 corresponding to the debit side of accounts 335, 635.

• Corporate income tax paid (Code 05): Credit side of accounts 111, 112 corresponding to the debit side of account 3334.

• Other cash receipts from operating activities (Code 06): Debit side of accounts 111, 112 after reconciliation with the credit side of accounts 711, 133, 141, 244, 136, 331.

• Other cash payments for operating activities (Code 07): Credit side of accounts 111, 112, 113 corresponding to the debit side of accounts 811, 161, 244, 333, 338, 344, 352, 353, 356.

→ Net cash flow from operating activities (Code 20) = Code 01 + Code 02 + Code 03 + Code 04 + Code 05 + Code 06 + Code 07.

Indirect method cash flow statement

Determines and calculates the cash inflows and outflows of operating activities by adjusting the pre-tax operating profit for non-cash items, changes in inventories during the period, receivables and payables of operating activities, and items affecting the cash flows of investing activities.

Advantages:

• Overcomes the disadvantages of the direct method by clearly showing the relationship between operating results and the operating cash flow results

• Easier to verify and reconcile with other financial statement data

Line items for preparing the statement:

• Profit before tax (Code 01): Taken from the Total accounting profit before tax line (Code 50) in the Income Statement for the period.

• Depreciation of fixed assets and investment property (Code 02): Provided the business can isolate the depreciation included in inventory, this line includes only the depreciation charged to the Income Statement for the period. Otherwise, it includes the depreciation of unsold goods. Figures are taken from account 214 corresponding to accounts 632, 641, 642.

• Provisions (Code 03): Reflects the impact of making, reversing, and using provisions on cash flows during the reporting period, based on the correspondence of accounts 632, 635, 642 with account 229.

• Gains or losses from foreign exchange rate differences arising from the revaluation of monetary items denominated in foreign currency (Code 04): Based on the correspondence on account 413 and accounts 635, 515.

• Gains or losses from investing activities (Code 05): Based on the correspondence of account 911 with accounts 5117, 515, 711, 632, 635, 811.

• Interest expenses (Code 06): Based on the ledger of account 635 corresponding to account 911.

• Other adjustments (Code 07): Based on the ledgers of accounts 356, 357.

→ Operating profit before working capital changes (Code 08) = Code 01 + Code 02 + Code 03 + Code 04 + Code 05 + Code 06 + Code 07.

Based on pre-tax profit plus the adjustments, if this figure is negative it is recorded in parentheses (…).

• Increases or decreases in receivables (Code 09): Based on the total difference between closing and opening balances of accounts 131, 136, 138, 133, 141, 244, 331.

• Increases or decreases in inventories (Code 10): Based on the total difference between closing and opening balances of accounts 151 through 158.

• Increases or decreases in payables (Code 11): The difference between closing and opening balances of accounts 331, 333, 334, 335, 336, 337, 338, 344, 131…

• Increases or decreases in prepaid expenses (Code 12): The difference between closing and opening balances of account 242.

• Increases or decreases in trading securities (Code 13): Based on the total difference between closing and opening balances of account 121 "Trading securities" during the period.

• Interest paid on borrowings (Code 14): Taken from the ledgers of accounts 111, 112, 131 corresponding to accounts 335, 635, 242 and related accounts.

• Corporate income tax paid (Code 15): Taken from the ledgers of accounts 111, 112 corresponding to account 3334.

• Other cash receipts from operating activities (Code 16): Based on the ledger of the debit side of accounts 111, 112 corresponding to the credit side of accounts 161, 136, 3386…

• Other cash payments for operating activities (Code 17): Based on the ledger of the credit side of accounts 111, 112, 113 corresponding to accounts 161, 353, 3386…

→ Net cash flow from operating activities (Code 20) = Code 08 + Code 09 + Code 10 + Code 11 + Code 12 + Code 13 + Code 14 + Code 15 + Code 16 + Code 17.

Sample statements

You can refer to the sample cash flow statement illustrations below.

Bilingual Vietnamese – English cash flow statement

Cash flow statement in English

Summary

We hope this article has helped you grasp the fundamentals of the cash flow statement and how to prepare it in line with Circular 200. For businesses to set up, consolidate, and manage financial statements as effectively as possible, accounting and finance management software is the comprehensive solution that simplifies and optimizes the accounting department's reporting workflow.

If you have any questions about preparing the cash flow statement with financial management software, don't forget to visit SimERP accounting software!

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