Definition and Types of Trading Company Cash Flow Statements

As with other types of companies, trading companies also need financial reports, one of which is the cash flow of trading companies. So that you know the meaning and types of cash flow statements of trading companies, here’s a look at the reviews below.

Definition of Trading Company

A trading company is a business that sells tangible or physical products to consumers. For example, such as clothes, jewelry, drinks, and so on. In the process, industrial trading companies will buy goods and then resell them without changing their form and essence. Generally, there are 3 kinds of products that can be sold, namely unfinished goods (raw materials),
semi-finished goods (foodstuffs, and finished goods.

The advantage that can be obtained by trading companies is when a transaction has occurred. Cash flow statements are very important, especially for large-scale companies. This is because the report can be useful, one of which is to make decisions and know the income and expenses of the company.

Types of Financial Statements for Trading Companies

If you want to enter the world of trading companies, it is very important to know several types of trading company financial statements, such as:
· Income statement
· Cash flow statement
· Inventory Report
· Balance Sheet
· Accounts Payable
· Accounts Receivable

Trading Company Cash Flow Activities

A statement of flow or financial statement of cash flow of a trading company is a summary of the income and expenses of a trading company at a certain time and period. Generally, these cash flows are divided into three, namely:

Operation activities

Operating activities are usually related to profit and loss from cost of goods, sales transactions, and operations.

Statements of cash flows from operating activities are mainly obtained from the company’s main revenue-generating activities. Therefore, these cash flows generally come from transactions and other events that affect the determination of net profit (loss). Examples of cash flow statements from operating activities can be in the form of:

• A cash flow related to income tax

• A cash payment to employees

• A cash payment to a supplier of goods and services

• In the form of cash receipts and payments from contracts entered into for business and trade transactions.

Investment activities

Investment activities are related to the sale and purchase of fixed assets.

A lot of information regarding investment activities can be extracted by simply looking at the changes in the related asset accounts during the current year. To determine the cash proceeds from sales transactions, companies need to adjust the amount of credit entries with the gain or loss recognized on the sale of assets.

Examples of cash flow statements contained in investing activities can be in the form of:

• Cash payments to purchase property, plant and equipment, intangible assets and other long-term assets, including capitalized development costs and self-constructed property, plant and equipment.

• An acquisition of stock or another company’s financial instrument.

• Cash receipts from the sale of land, buildings and equipment, intangible assets, and other long-term assets.

Financing and financing activities

This activity is related to the company’s capital and company obligations, such as increasing capital, selling securities, and paying debts.

This cash flow statement can be prepared based on two data sources, namely; current and previous period balance sheets, as well as profit/loss statements for this period. The presentation can also be made in two ways, namely the direct method (direct) and the indirect method (indirect).

The difference between the two lies only in the presentation of data originating from operating activities. In the direct presentation, operational activities are grouped into various categories, including being broken down into two types of cash flows; inflow or outflow.

Meanwhile, in the indirect presentation, cash flows from operating activities are determined by correcting the existing net income in the income statement. So, the indirect method focuses more on the data already in the balance sheet and income statement.

The cash flow statement will not only be very useful to facilitate checking cash in the period, but also can be the basis for predicting the uncertainty of cash flows in the future. Therefore, this report will be very useful for creditors, investors, management, or other related parties.

Types of cash flow statements

In making a cash flow statement, there are two methods that can be used, namely the direct method cash flow statement and indirect cash flow report method.

Direct Method

The direct method of cash flow statements for trading companies is a method of preparing cash flow statements by calculating directly from operating activities based on receipts and expenses from trading companies.

In this direct method, it produces information that is useful in estimating future cash flows that cannot be generated by the indirect method. In addition, the direct method shows operating cash receipts and disbursements, this is in line with the purpose of the cash flow statement, namely to present information about cash receipts and cash disbursements, compared to the indirect method which does not report cash receipts and disbursements.

In a statement of cash flows direct method, the main advantage of the direct method is that this method reports the sources and uses of cash in the statement of cash flows. The main drawback is that the data needed is often difficult to obtain and usually expensive.

From a Direct method it categorizes the main categories of operations. The direct method is easier to understand, and provides more information for making decisions.

Indirect Method

The indirect method on the cash flow statement of a trading company is a method of making cash statements whose cash flows are greater than the company’s operating activities. This method is calculated based on the income statement, which is then adjusted for depreciation and amortization. That is, regarding the definition of a trading company and its types. Hopefully this article can help and provide benefits for you.

Under this indirect method, net profit or loss is adjusted by correcting for the effects of non-cash transactions, deferrals or accruals of cash receipts or payments for operations from prior to future years, and items of income or expense related to the investment’s cash flows. or funding.

So basically this indirect method is a reconciliation of net income obtained by the company. In the indirect method, it provides a series of relationships between the cash flow statement and the income statement and trial balance.

The main advantage of the indirect method is that it focuses on the difference between net income and net cash flows from operating activities. That is, the indirect method provides a useful link between the cash flow statement and the income statement and balance sheet.

Many companies that present financial statements argue that it is cheaper to adjust net income to net cash flows from operating activities (indirect) than to report gross operating cash receipts and payments (direct).