CASH FLOW STATEMENT

Cash flow statements assess the amount,timing and predictability of cash inflows and cash outflows,and are used as the basis for budgeting and business planning. It is fragmented into 4 main sections:

* Operating-activities (sales of goods and services)

* Investing-activities (sale or purchase of an asset)

* Financing-activities (borrowings or sale of common stock)

* Disclosure of non-cash activities 

The above highlighted sections show the overall (net) change in the firm’s cash-flow for the period the statement is prepared.

 

Cash flow statement constitutes the critical set of financial information required to manage a business, for without a cash flow statement, it may be difficult to have an accurate picture of a firm’s performance.

As the income statement tells one how much interest a firm paid on a loan and the balance sheet tells one how much a firm is owing, only the cash flow statement will tell how much cash was consumed servicing the loan.

The income statement will record sales and profits but the cash flow statement will alert one if those sales are not generating enough cash to cover the expenses. Thus, it is said that the cash flow statement is a better tool of analysis.

Cash flow statement matters because it helps companies expand, develop new products, buy back stock, pay dividends or reduce debt. It relies heavily on the state of a company’s net income. Thus, higher revenues, lower overhead, and more efficiency are big drivers of cash flow.

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