Statement of Cashflows

Sapna Agnihotri
December 2, 2021

What Is a Cashflow Statement?

Cashflow Statement is a financial summary of Cash and Cash Equivalents that enter and leave the company within a period. The United States Financial Accounting Standards Board has included Statement of Cashflows as part of mandatory financial reporting since 1987. As a supplement of Balance Sheet and Income Statement, Cashflow Statement measures the ability of a business in generating cash income to pay off debt obligations.

Benefits of a Cash Flow Statement

  • Cash Flow Statement helps in knowing the exact figure of cash inflows and outflows from various operations of the business. It helps in comparing the cash budgets of past assessments with the present to assess the future requirements of the cash. It gives the accurate information about the cash-based transactions in the business.
  • Cash flow statement majorly used in preparing the cash budget for future needs and helps in knowing the periodical requirement of cash in the business.
  • It reveals the key changes required for the financial positioning of the business and prioritizes important activities to the management.
  • It provides the information about various investing and financing cash transactions takes place during the year and helps in evaluating the financial structure of the business. Cash Flow statement helps in identifying the profitability of the business when it compared with the ratio analysis.

There Are Three Categories in A Cashflow Statement Which Classify the Financial Nature of a Particular Cash-related Transaction.

  • Operating Activities – Cash inflows or outflows that are directly related to a company’s daily operations.  
  • Investing Activities (non-current assets) – Cash receipts from sales of company assets (i.e., Property, Plant and Equipment), equity securities of other entities, and collection of loans; Cash payments from purchase of assets, equity securities of other entities, and loans to other entities.
  • Financing Activities (non-current liabilities and equity) - Cash inflows from issuance of equity securities and bonds, and payment of dividends, redemption of debts, and reacquisition of stock.  

Towards the end of a Statement of Cashflows, the beginning and ending balances are shown respectively to indicate the net cash change during the period. Note that Cashflow Statement is different from Income Statement and Balance Sheet in a way that it does not include future incoming and outgoing cash activities that has been recorded on credit.

Why Is It Important to Include a Cashflow Statement in Your Company’s Financial Performance Evaluation?

In addition to legal compliance, the Statement of Cashflows provides additional financial information for potential investors regarding the corporation’s liquidity, solvency, and financial flexibility. It is a perfect indicator in showing the preparedness of your business for any emergency. It also lists out where the cash inflows are coming from and where the cash outflows are spent. It allows investors to make accurate investment decisions.  

How Do We Evaluate a Statement of Cashflows?

Stable cash inflow is the basis of a healthy and solid business. Corporations can have negative net cash provided by operating activities on the Cashflow Statement, while reporting a positive net income on the Income Statement. This is exactly why the Statement of Cashflows is crucial, especially for businesses that seek for improvements in cash-related transactions.  

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