The statement of cash flows, sometimes alternatively referred to as the cash flow statement, shows law firms where the cash is coming in and where it’s going.
On the report, the cash flow statement will list inflows and outflows into helpful line items. It includes cash from investing returns, operating activities and financing/borrowing. This statement provides firms with a short-term outlook that can help in giving insight to manage bill payment, payroll funding and purchases.
The cash flow statement is not equal to the amount of cash in the bank, which shows up on the balance sheet. Instead, the cash flow statement complements the income statement and balance sheet and shows activity by a certain time period.
When looking to obtain loans, financial officers will frequently review the cash flow statement as part of their evaluation to determine the law firm’s financial stability.
There are two methods for calculating cash flow: the direct method and the indirect method. Under the direct method, all cash payments and receipts are added up and evaluated for the net increase or decrease in these accounts. Under the indirect method, net income is first removed from the income statement in order to determine cash flow from operating activities.
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