In this video explore financial accounting framework video explaining all the structure.
As the name suggests, a cash flow statement is nothing but a statement produced by a company on an annual basis to identify the inflows and outflows of cash and cash flow statement template must be used. It should not be confused with income statement which identifies the profit for the year. The cash flow statement lets you know the exact scenario of the cash in hand of the business. Therefore the cash flow statement is necessary to understand the liquidity position of the company. The cash balance presented in the balance sheet is tied with the profit shown in the income statement and therefore the cash statement provides a link between the statement of financial position and statement of comprehensive income.
The statement of cash flows is basically a summary of the transactions that result in cash or cash equivalents during a particular period. In other words it is a summary of all the cash payments and the cash receipts that occurred during the month, quarter or year for a business.
There are three sections of the statement are operating, investing and financing.
Each section of the statement provides insight into the business activities and where the cash came from or where it went to. The operating section of the cash flow statement has the information on the cash received by sales and production activities as on the income statement whereas the investing section depicts the picture how the cash is being utilized in the business.
The cash flow statement is of immense importance to the investors as the cash flow statement shows the transactions those are not found in the balance sheet and income statement. the liquidity of the is directly on the cash position; so any change in cash flow from year to year will help the investors to identify the change in liquidity and hence it will enable the investor to pay off the debts without trouble. The cash flow statement is also the indication of the current capital expenditure policy as the investing section highlights the expenditure on equipment. A negative or a positive investing cash flow does not tell you the true position of the company as it also may be the case that negative cash is due to high capital expenditure in a given year whereas a positive investing cash flow could come about as a result of sale of equipment. These are one off items and hence they should not be used for assessment of the liquidity position of a company.
