Cash Flow Statement

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Definition and intro.:

An accounting statement called the "statement of cash flows" shows the amount of cash generated and used by a company in a given period. 

The cash flow statement (CFS), a mandatory part of a company's financial reports since 1987, records the amounts of cash and cash equivalents entering and leaving a company. The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent. 

The statement of cash flows can be used to answer crucial questions such as the following:

1. Is the company generating sufficient positive cash flows from its ongoing operations to remain viable?

2. Will the company be able to repay its debts?

3. Will the company be able to pay its usual dividends?

4. Why is there a difference between net income and net cash flow for the year?

5. To what extent will the company have to borrow money in order to make needed investments?

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Sources of information:

The information to prepare this statement usually comes from three sources:

1. Comparative balance sheets provide the amount of the changes in assets, liabilities, and equities from the beginning to the end of the period.

2. Current income statement data help the reader determine the amount of cash provided by or used by operations during the period.

3. Selected transaction data from the general ledger provide additional detailed information needed to determine how cash was provided or used during the period

People interested in CFS:

People and groups interested in cash flow statements include:

▪ Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses

▪ Management, who need to determine the requirements of company:

Dividend policy

Cash generated by operations

Investing policy

Financing policy

▪ Potential lenders or creditors, who want a clear picture of a company's ability:...