In financial accounting, a cash flow statement, also known as the statement of cash flows, is a financial statement that summarizes the amount of all cash inflows and outflows of the company.
The cash flow statement is a mandatory part of a company’s financial reports since 1987.
The Statement of Cash Flows is one of the 3 key financial statements that reports the money generated and spent throughout a particular period within the organization.
How a Cash Flow Statement is Prepared
For a business organization, the cash flow statement is the foremost vital financial statement to prepare. It traces the flow of funds (or working capital) into and out of business throughout an accounting period.
For a small business, a cash flow statement ought to be in all probability to be ready as often as possible.
Three Sections of a Statement of Cash Flows:
1. Cash from operating activities,
2. Cash from investing activities,
3. Cash from financing activities.
1. Cash from operating activities
Cash Flow from Operations usually includes the money flows related to sales, purchases, and other expenses. In other words, it reflects how a lot of money is generated from a company’s products or services.
These operating activities include_ Receipts from sales of products and services, Interest payments, Income tax payments, Payments made to suppliers of products and services, Salary and wage, Rent payments, etc.
2. Cash from investing activities
Cash Flow from investment Activities includes the cash flows related to buying or selling property, plants, equipment, other non-current assets, and other financial assets.
Usually, cash flow from investment activities is a “cash-out” item because money is spent on new instrumentation, buildings, or short-term assets such as marketable securities.
3. Cash from financing activities
Cash flows from financing activities generally include cash flows associated with borrowing and repaying bank loans and issuing and buying back shares.
The payment of a dividend is also treated as a finance income. If a company issues a bond to the general public, the company receives cash financing; but, when interest is paid to bondholders.
Cash Flow Statement Example
Here is an example of a statement of cash flow:
Importance of Cash Flow Statement:
It is equally as important as like as the profit-and-loss statement and balance sheet for cash flow analysis.
Without a cash flow statement, it may be tough to have a correct image of its performance.
The income statement can tell you the way a lot of interest you paid on loan, and therefore, the record can tell you the way a lot of you owe, but solely the cash flow statement can tell you the way a lot of money was consumed servicing that loan.
The income statement can record sales and profits; however, it’s the income statement that may provide you with a warning if those sales aren’t generating enough money to cover expenses.