The cash flow statement is one of the most important financial statement that allows investors to know how a company is functioning and where its money is coming from and where it’s spent. Its significance has only risen in the last few years, and it has helped investors to know whether a company is placed well in financial terms. In this article, we shall look at Cash Flow Statement in detail.
Cash Flow Statement-Meaning
The meaning of Cash Flow Statement can be defined as cash flow statements that exhibit the flow of incoming and outgoing cash. This statement assesses the ability of an enterprise to produce cash and use the cash. This statement serves as a tool for assessing the liquidity and solvency of the enterprise.
It is a financial statement that provides total data, which can be explained as a financial statement that estimates the cash produced or utilized by a firm in a presented time.
Essential points to be known about Cash Flow Statement
This statement provides data regarding the shift in the position of cash equivalents and cash of a firm over an accounting period. The pursuits as per this change is incorporated in investing, financing, and operating.
However, the following points may be noted:
At the time of outlining a CFS, complete specification about outflows as well as inflows are provided below these titles involving the net cash flow;
The average of net cash flows is operated out and is provided as Net increase or decrease in cash equivalents and cash to which the amount of cash and cash equivalent at the commencement is totalled, and the quantity of cash and cash equivalents at the end is reported;
This sum shall be the same as the entire amount of cash at bank, cash equivalents, and cash in hand reflected in the balance sheet;
In case the cash flows from the operating activities are formed by direct method at the time of outlining the CFS, it shall be known as Direct Method CFS; and
Unless it is stipulated in a precise manner as to what approach is to be imbibed, the CFS may be first outlined by an indirect method as is prepared by most organizations.
Objective of Cash Flow Statement (CFS)
The objectives of CFS are as follows:
To give information on cash inflows and cash outflows from operating, investing, and financing activities.
To know net changes in cash equivalents and cash.
What are the advantages of Cash Flow Statement (CFS)?
The advantages of CFS are enlisted below:
When a CFS is employed with other financial reports, it allows users to assess variations in net assets of a firm and the economic system of that firm. It involves liquidity and stability, the ability to influence the amounts and cash flows timings to adjust to different conditions and possibilities.
The cash flow data evaluates the ability of a firm to generate cash and cash equivalents. It allows users to produce models to assess and analyse the existing value of the existing cash flows of different companies.
It also helps in assisting the stabilization of cash inflow and outflow. It is essential even in verifying the correctness of prior estimates of anticipated cash flows and in knowing the association between profitability and net cash flow and results of different cost prices.
The CFS gives insights and helps investors to know the status of the operations of a company as to from where the money is coming and how well the money is used. The statement is important as it helps people investing determine that the financial status of an organization is reliable or not.
What are the elements of Cash Flow Statement?
The elements of CFS can be divided into the following:
Cash flow from operating activities;
Cash flow from financing activities; and
Cash flow from investing activities.
Cash flow from operating activities-
Operating activities refer to the operations of the company that are directly associated with furnishing its commodities and services to the market place. Operating activities are the main source of revenue and expenditure in an organization.
The operating activities on the CFS has various uses and gets cash from the operational activities of a company. In other words, it reflects how much money the company generated from the products and services.
Cash flow from financing activities-
It covers all sources of cash from banks or investors to the cash used to pay the shareholders. Likewise, a settlement for repurchased stock, payment of interests, and the compensation of debt are recorded under this category.
Cash flow from investing activities-
All the use of funds from a firm’s investment is included in the investing activities. Under this category, sale or assets possession, credit offered to merchants or collected from customers, and payments linked with an acquisition or amalgamation are included.
Methods of Cash Flow Statement
Cash flow from operating activities is determined through direct or indirect methods.
The process is explained below:
Direct Method– In case of direct method, the notable titles of cash inflows and outflows are contemplated. It is imperative to understand that items are reported on accrual data in profit and loss statement.
Indirect Method– Indirect method of knowing cash flows from operating pursuits commences from the net profit and loss amount. This includes the results of all operating activities of a firm.
What are the limitations of CFS?
The limitations can be summed as under:
It ignores non-cash transactions;
It ignores the concept of accrual;
It is historical in nature;
It cannot be understood as a substitute for an Income Statement; and
It is not apt for judging liquidity of an enterprise.
It is quite apparent that Cash Flow Statement is an indispensable means to measure how well a company manages its cash position. Its importance can never be undermined in an organization and for an investor. Therefore proper Cash Flow management should be ensured in an organization for its success in the long run.
Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on corporate law. He is a creative thinker and has a great interest in exploring legal subjects.