Statement of Cash Flows

The statement of cash flows is one of four main financial statements. This statement reports how the cash was generated and how it was used for a specified time period, like a quarter or fiscal year.

There are four categories of how cash is generated and used on the cash flow statement. These categories are operating activities, investing activities, financing activities, and supplemental information.

The reason that the statement of cash flows is so important to investors and management is that the income statement is usually based on accruals, so the revenues reported may not have been collected yet, and the expenses may not have been paid yet.

To investors, they see the cash that flows in and out of the company. If the company is generating more cash consistantly than it uses, the more stable the company is. They have a much better h yoce at increasing dividends, buying back their stock, reducing debt, or even buying other companies. These are all signs of a well run company. Also, if cash from operating activities is more than the net income on a regular basis, the company's earnings are said to be of "high quality". If it is less than the net income a lot, questions will be raised on why the net income is not turning into cash.

Kelle

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I agree with your response Kelle. If the cash flow is very stable and a lot of profit is made, then the organization will have an increase in share buyers of its share, and over time once all of its shares are bought, the price of the shares will increase dramatically due to availability and demand, which is very good for the organization. However, if they have an unstable cash flow, they will lose investors, lose share value and over time may reach bankruptcy.

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