Cash Flow Statement

Everything you need to know about Cash Flow Statements:

What is a Cash Flow Statement?

• In traditional financial accounting, a cash flow statement is a financial document that shows how changes in a firm’s balance sheet and income will invariably affect cash and cash-like assets. Furthermore, the cash flow statement will divide the firm’s expenses and income statements into investing, operating and finance-related activities.

• In essence, a cash flow statement is concerned with the flow of cash and cash-like securities in and out of a business. The cash flow statement must capture both the firm’s current operating results and the accompanying changes of their balance sheet. When used as an analytical tool, the cash flow statement will be successful in determining the short-term viability of the underlying company. More specifically, the cash flow statement is used as a marker to indicate how well or timely a company can meet its debt obligations.

Who uses the Cash Flow Statement?

• The following people and business organizations will utilize a cash flow statement to discern the true health of a company:

o Accounting personnel who need to evaluate the organization’s ability to cover payroll and other immediate expenseso Potential investors who need to analyze and judge whether the company is financially stableo Potential creditors or lenders who will require a clear picture of a company’s ability to fulfill loan obligationso Shareholders who possess a percentage ownership in the businesso Potential employees or contractors who are required to know whether the company will be able to afford compensation

General Purpose of the Cash Flow Statement:

• The cash flow statement will reflect a firm’s liquidity and more specifically their ability to meet short-term liabilities. The balance sheet represents a snapshot of a firm’s financial resources and obligations at a single time period, while the income statement will summarize a firm’s financial transactions over an interval of time. These two financial documents reflect the foundation of a firm’s accounting endeavor; combined, they will match a firm’s revenues with the expenses associated with generating such revenues.

• In contrast to the previously mentioned financial documents, the cash flow statement will include only inflows and outflows of cash or cash-like securities; the cash flow statement excludes transactions that do not directly alter cash payments and receipts. As a result, the cash flow statement is a cash basis report on three basic financial maneuvers: investing activities, operating activities and financial activities.


• The cash flow statement will intend to provide a firm with the following functions:o The cash flow statement will provide information on a firm’s liquidity and its ability to alter cash flows for future obligations or circumstanceso The cash flow statement will provide additional information for evaluating changes in assets, liabilities and equityo The cash flow statement will improve the comparability measures of different company’s operating performances through the elimination of different accounting methodso The cash flow statement will indicate the amount, probability and timing of future cash flows