Cash Flow Statement – Definition

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Cash Flow Statement Definition

A cash flow statement refers to a financial statement of a company that provides information about the cash inflows that it has received from its operational, investment, and financing activities, and cash outflows that it has paid for its organizational purposes and investments in a specific period of time.

A Little More on What is a Cash Flow Statement

Out of the two accounting areas of accrual and cash, the cash flow statement emphasizes on the field of cash accounting. Majority of the public organizations consider using accrual basis of accounting which signifies that the income statement of a company is different from its cash position.

For instance, a firm may sell its products to customers on credit. This means that the firm will still treat that sale as revenue, but since the sale was on credit, it may not get cash until a few days or months. Here, the income statement of the company will show a profit, and it will be liable to pay taxes on this amount. However, the firm may not be able to bring in the same amount of cash as represented by its sales or income amounts. Not only small companies, but even big firms find it hard to manage their cash flow statements in an effective manner. Hence, it is a crucial statement for firms, business analysts, and investors. Every cash flow statement involves three types of business activities including operations, investing, and financing.

Cash flows from operations

The first type of business activity included in the cash flow statement is cash flow from operations. It records all transactions taking place in the business on day-to-day basis. The business needs to start off their cash flows from operations category with its net income. After that, it makes reconciliations for all non cash operational items, and converts them to cash. For instance, accounts receivable is treated as a non-cash account. When people are buying more on credit, the accounts receivable account will increase. This means that the business has made sales, but it hadn’t received any cash for its transactions yet. This leads to accounts receivables being shown with a negative sign, or deducted from the net income. Other elements that are included in the cash flow from operations are accounts payable, amortization, depreciation, prepaid items recorded as revenues or expenses, but without involving any cash flow.

Cash flows from investing

Cash flow from investing is the second stage in the cash flow statement that involves purchase and sale of business property, equipment, machinery, and plant. Analysts use this section for ascertaining changes in the capital expenditures. Though the positive cash flows indicate a good sign for the firm’s cash position, but investors would still consider firms that can create cash flow from their operational activities. Also, if a company sells a specific equipment or plant in this section, it will bring in more cash in the firm.

Cash flows from financing

Last but not the least, cash flow from financing is the last section prepared in the cash flow statement. This section provides insights on the cash that a business uses in financing its operations. Financial analysts use this area for ascertaining the amounts that the company has paid to its shareholders in the form of dividends or share buybacks. When companies receive or pay cash in the form of equity or debt are recorded here in cash flow from financing.

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