Cash Flow Statements

A financial statement showing the effect of balance sheet accounts and income on cash and cash equivalents is known as cash flow statement or statement of cash flows or fund flow statement. The cash and cash equivalents breaks the analysis down to operating, investing and financial activities. Cash flow statement deals with cash inflow and cash outflow of the business. The current operating changes and the accompanying changes in the balance sheet will be mentioned in the financial statement. Fund flow statement is an analytical tool used for determining the short term viability of the company. Accounting personnel, potential lenders, potential investors and shareholders of the business are interested in cash flow statements.

Purpose of cash flow statement

The cash flow statement was previously known as low of cash statement. The fund flow statement reflects the liquidity of a firm. The balance sheet represents the financial resources and obligations at a single point in time. The income statement summarizes the financial transactions of a firm over an interval of time. Balance sheet and income statement reflect the accrual basis accounting. The cash flow statement includes cash inflow and cash outflow and cash equivalents. These financial statements exclude transactions that do not directly affect cash receipts and payments. Cash flow statement is based on operating activities, investing activities and financing activities. Cash flow statements provide information on a firm’s liquidity ad solvency. Fund flow statement is planned to provide additional information for evaluating changes in assets, liabilities and equities. Cash flow statement eliminates the effects of various accounting methods to improve the comparability of operating performance of various firms. Cash flow statements indicate the amount, timing and probability of future cash flows. It is a standard financial statement as it eliminates allocations.

Cash flow activities

Cash flow statement is divided into three segments like cash flow resulting from operating activities, cash flow resulting from investing activities and cash flow resulting from financing activities. Operating activities include production, sales and delivery of company’s product. operating cash flow include receipts from the sale of goods or services, receipts from the sale of loans, debt or equity instruments, interest received on loans, dividends received on equity securities and interest payments. Purchase or sale of an asset, loans made to suppliers and payments related to mergers and acquisitions are investing activities. Proceeds from issuing long term or short term debt, payment of dividends and repayment of debt principal are financing activities.

Questions:

• Define cash flow statement?
• What is the importance of cash flow statement?