What is a Cash Flow Statement?

How a statement of cash flow works

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A Cash Flow Statement is a financial statement that allows you to see how much cash is coming in and how much is leaving a business over a particular period of time (could be monthly,quarterly,yearly). It presents a record of how much cash is available on hand for the business to access in order to keep it operating successfully.

How do you use a cash flow statement?

The Cash Flow Statement allows an investor to see how well a company can generate cash and where the sources of that cash generation are. The cash that is available to pay a company’s debt obligations and general operating expenses provide important information to determine whether the business is in a strong financial position.

It also allows you to see changes in the cash position of a company from one period to another and can provide useful information for creditors to ascertain the liquidity of the company and help assess the risks of lending.

What's included on a cash flow statement?
    • Included in the statement is information about where the cash is coming from and going to over a particular period
    • Cash flow from operations; this could be cash from sales of goods or services, payments of income tax due in that period, payments to suppliers, salaries, wages and rents
    • Cash flow from investments; this could be an outflow of cash for long term assets
    • A cash flow statement will show cash flow from any financing; this could include payments and dividends to shareholders
    • It will also show if the company is raising capital by taking out debt or issuing stock

Advantages and disadvantages of a cash flow statement

Advantages of a cash flow statement
    • It is helpful to see how effective a company is at generating cash flow to fund its operating expenses.
    • It can determine the cash position of the company for a particular period
    • A cash flow statement can help to ascertain the optimum cash position for the company
    • It can show the cash earning capacity of a company
    • Provides information to help management planning and budgeting
    • Clearly shows a comparison between actual cash flow with projected cash flow

 

Disadvantages of a cash flow statement
    • It can be inaccurate - cash spending can be delayed and manipulated in order to improve the cash flow in a particular period
    • It doesn’t give a complete picture of the company’s financial position
    • Its actual liquidity cannot be assessed only ascertained from a cash flow statement
    • It is not a useful tool for the comparison of similar firms

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