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Cash flow statement

What is a cash flow statement?

A cash flow statement is a financial statement that shows how changes in the balance sheet accounts and income affects cash and cash equivalents. Basically, it’s concerned with the flow of cash in and out of the business. The statement captures the current operating results and the changes with it, in the balance sheet. The cash flow statement is useful in determining the short-term viability of a company.

Purpose of the cash flow statement.

The cash flow statement reflects a company’s liquidity.
The balance sheet is merely a snapshot of a company’s financial resources and its obligation at a certain point in time. The income statement provides a summary of the company’s financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues. The cash flow statement includes only the inflow and outflow of cash and cash equivalents. Transactions tat do not directly affect cash receipts. These non-cash transaction include items such as depreciation or write-offs on bad debts just to name two examples.

The statement is a cash basis report on three types of financial activities:

  • Operating activities
  • Investing activities
  • Financing activities.

The intended purpose is to:

  1. Provide information on the entity’s liquidity, solvency and its ability to change cash flows.
  2. Provide information for evaluating changes in assets, liabilities and equity.
  3. Improve the comparison between the performance of different entities by eliminating the effects of different accounting methods.
  4. Indicate the amount, time and probability of cash flows in the future.

The cash flow statement has been adopted as a standard financial statement because it eliminates allocations. These allocations might be derived from different accounting methods. An example would be the depreciation of assets from various time frames.