What is Cash Flow Statement? || Definition, Calculation, Importance & Objectives:
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In this article, we will be representing the vital part of analysing the financial statements to understand the cash flow statements.
Along with Balance Sheet and Income Statements, Cash Flow statement also has an essence of knowing about its reporting as it is essential for the small business accounting and to make sure to keep cash in enough to use it in for day to day operating.
Not only it refers to small business, but it is majorly used for large companies, one needs to look out its reporting and to know its fair reporting.
As in each company, everybody uses cash for the business and correct reporting; an analyst has to check the reporting is done in a good base.
So for that, we are studying the topic in brief about Cash Flow Statement.
This article is on “What is Cash Flow Statement?” that will disclose the different arenas referring to the analysis of the Cash flow and the entire relevant topic to understand under this.
In financial terms, the cash flow statement is a report that has both inflows and outflows of cash in the business.
Let’s get started with the definition first.
What is Cash Flow Statement?
A Cash Flow Statement gives information about a financial statement that tells about how much cash a company has on hand for a specific period.
It also tells about the changes in cash and cash equivalents of a business by classifying the cash flows into different activities.
There are three activities in which the cash flow is differentiating:
I. Operating Activities:
This activity reports the items that have been converted from the income statements on the accrual basis of accounting to cash.
II. Investing Activities:
Under this reporting, the elements of the purchase and sale of long-term investments, and property, plant and equipment are included.
III. Financing Activities:
Financing Activities includes the reporting of the issuance and repurchase of the Company’s bonds and stock, the payment of dividends, and borrowings and repayment of Short-term and Long-term bank loans and other debt.
The Income Statement gives the idea of the profits, but it does not provide the reflection of the cash components that are used or received.
Like other statements, the cash flow statements are made up annually, but it can be made more often, and it must cover all the flows of cash over a while.
Why do you need Cash Flow Statements?
There are three factors or reasons that indicate the need for the Cash Flow Statement:
• It indicates the Liquidity
• It gives the differences or changes in Equity, Assets, and Liquidities
•It is also helpful to make the cash flow projections
Let’s move ahead to understand the Objective of preparing of Cash Flow Statement.
Objectives of Preparing Cash Flow Statement
• Cash Flow Statements represents the inflow and outflow of cash and cash equivalents that have various activities in a company during a specific period under the various main activities that are differentiated.
• It provides the information through the Cash Flow Statement that will be useful in assessing the ability of any company to generate the cash and cash equivalents and the needs of the company to use those Cash Flows.
• For making an economic decision it requires an evaluation of the ability of a company to see to it their generation of cash and cash equivalents, which is provided by the Cash Flow Statement.
In the topic, we have used cash and cash equivalents several times, and it usually consists of the following:
a. Cash in Hand.
b. Cash at Bank.
c. Short-term investments that are highly liquid.
d. Bank Overdrafts.
Purpose & Importance of Cash Flow Statements:
- By analysing the critical changes properly in the financial position during a period, the cash flow statement help to highlight the priorities of management.
- The statement provides the insights by highlighting the essential about the liquidity and solvency of a company which is necessary for the survival and growth of an organisation.
- This is also used by the analyst to use the information about the historical cash flows for projections of future cash flows of a company on which to make a base for economic decisions.
- By making the comparison of cash flows of different companies, it will be helpful to reveal the relative quality of their earnings as cash flow information is more objective as against to the financial performance reflected in the income statement.
In a nutshell, the essential part of any business is profits that are well depicted by the Cash in the company.
As it is correctly stated by Chris Chocola, “The fact is that one of the earliest lessons I learned in business was that balance sheets and income statements are fiction, cash flow is reality”.
From this article on, “What is Cash Flow Statement?” all the pointers that are highlighted is the definition, calculation, importance and objectives.
It is quite justified to know that Cash Flow Statement analysis is a must to know information for all the fundamental investors or analyst to check upon the reporting of the items by the Company.
From this I would like to conclude the topic that cash and cash equivalents are an essential aspect for any firm and one should use it appropriately for the expansion of the company that will result into the increment in the future earnings.
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