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What the Cash Flow Statement Is and How to Understand It

What the Cash Flow Statement Is and How to Understand It

cash flow

What is a cash flow statement?

A cash flow statement, which is also commonly referred to as the statement of cash flow, is basically a financial statement that depicts a complete summary of the total value of cash and its equivalent, which either enters or goes out from any company. It is basically a measurement of the efficiency with which a particular company is able to generate cash in order to pay its debt obligations while also providing funding to its operating expenses.  This cash flow statement is complemented by both the income statement and also the balance sheet.  Introduced in 1987, it has since become an essential part of the financial reports of many global companies.

How can one utilize the cash flow statement?

A CFS is helpful for investors in understanding the manner in which a company operates. They analyze the sources the money is coming to them from and also the areas in which they spend the money and also how that money is spent.

CFS helps in determining a company’s financial condition and the extent to which their financial foundations are fortified.

CFS is also useful to investors who can easily determine the amount of cash that is available for the company so that they can pay for their debts and fund their operating expenses.

How to understand the cash flow statement?

Since a cash flow statement is the basis of determining the budget, timing, and fixing of  future cash flows, it becomes quite essential for every company to understand it.

A cash flow statement is basically a report which has a collection of all the relevant data that is related to the inflow and outflow of cash which is made either in the form of receipt or in the form of payment. This procedure involves dealing with the operation, investment, and financial aspects of that particular business in a given period of time.

In this way a CFS acts as a bridge between the balance sheet and the income statement. It keeps track of the inward and outward flow of money which helps in measuring the cash positing of a company.

The format of a cash flow statement

The format of CFS mainly consists of three parts which are cash from working activities, cash from investing activities, and cash from financing activities. It also has a fourth part which is related to non-cash activities called GAAP. When this CFS is disclosed by acknowledging the accounting principles, the non-cash activities are included.

Operation of Cash Flow Statement

The operating activities generally depict the amount of cash that is generated by the products or the services of any particular business.  The activities reflect the revenues which are primarily producing.  The CFS can be presented in two different modes which are either direct or indirect presentation.

Step to prepare a cash flow statement

The following are the steps required to prepare the cash flow statement:

  • First the information is taken out from the income statement of the present year.
  • After that a balance sheet of the past two years is prepared.
  • Then adjustments are made to the net income for deferrals.
  • And finally accruals take place.

The CFS is important for any business and needs to be well understood in order to function fully. 

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