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What is a Cash Flow Statement?

As a business establishment, one needs to review how well his company is doing over a period of time. An accountant’s job is to prepare the financial statements by measuring the company’s performance. The key financial statements include the Balance Sheet, Income Statement and Statement of Cash Flows. Each statement has its own significance like sharing the snapshot of performance results with our venture capitalists, equity investors, lenders or Board of Directors and more likely than not, the crucial employees.

A typical balance sheet is a representation of the firm’s financial position whereas the cash flow statement and income statement are more elemental showing the performance over a fixed period of time which ends on the day that they are prepared. Generally, the income statement is more relevant since it shows the sales, expenditures, profits and losses for the said period. In some cases however, cash flow statement is most important especially small scale businesses, since they cannot depend on virtual money for long or for a bigger sum.  They will want to keep a tab on customers, employees, vendors, shareholders, whoever is a stakeholder in the firm since they depend on their income for their expenses. They cannot pay monthly salaries to employees unless they receive the money due from their customers. It can be assumed that unless one intends to sell his business for a profit, he has to eventually rely on the firm’s cash flow analysis for compensation.

Mismanagement of cash inflows or outflows may cause a liquidity crunch. This forces one to borrow at a disadvantage: he may be so needy of short-term cash that he is likely to pay more for the loan than he would with efficient cash-management techniques.

A statement of cash flow is divided into three major categories: Operating Activities, Financing Activities and Investing Activities. All aspects of a business are covered amongst the three major areas. The results obtained from this report are equivalent of the direct flows of financial information obtained from three other reports in the financial statement set. The only variance arises in reporting the operating activity area relating to the cash transactions. In case a business chooses to implement the direct method, there must also be an agenda attached that is generally also the indirect method so as to reconcile the information portrayed in the direct method.

In order to assess a firm, the following numerical in the Cash Flow statement[1] are considered:

  • Depreciation expenses
  • Alterations in accounts receivable
  • Alterations in accounts payable
  • Net profit/ net loss information
  • Change in inventory
  • Modifications in the ‘net cash emerging from financing activities’ which does not represent equipment or building additions.


[1] HANCOCK BANK Cash http://partners.financenter.com/financenter/learn/guides/smbizcashflow/importance.fcs?portal=commercial

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