Cash Flow Statements; In financial accounting, a cash flow statement, also known as the statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. What does Cash Flow Statements mean? Introduction, Meaning, and Definition; Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet.
Know and Understand the concept of Cash Flow Statements.
The cash flow statement was previously known as the flow of funds statement. The cash flow statement reflects a firm’s liquidity. The balance sheet is a snapshot of a firm’s financial resources and obligations at a single point in time, and the income statement summarizes a firm’s financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues.
The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments. These noncash transactions include depreciation or write-offs on bad debts or credit losses to name a few. The cash flow statement is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Noncash activities are usually reported in footnotes. As well as know more; Cash Flow Statement: Explanation, Classification, and Objectives.
#Introduction to Cash Flow Statements:
Did you know? You can earn our Financial Statements Certificate of Achievement when you join PRO Plus. To help you master this topic and earn your certificate, you will also receive lifetime access to our premium financial statements materials. These include our video seminar, visual tutorial, flashcards, cheat sheet, quick tests, a quick test with coaching, business forms, and more. The official name for the cash flow statement is the statement of cash flows. The statement of cash flows is one of the main financial statements.
#Meaning of Cash Flow Statements:
Cash Flow Statement is a statement which describes the inflows (sources) and outflows (uses) of cash and cash equivalents in an enterprise during a specified period of time. Such a statement enumerates the net effects of various business transactions on cash and its equivalents and takes into account receipts and disbursements of cash.
A cash flow statement summarizes the causes of changes in the cash position of a business enterprise between dates of two balance sheets. According to AS-3 (Revised), an enterprise should prepare a cash flow Statement and should present it for each period for which financial statements are prepared.
The terms cash, cash equivalents, and cash flows are used in this statement with the following meanings:
- Cash comprises cash on hand and demand deposits with banks.
- Cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
- Cash equivalents are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes.
- For an investment to qualify as a cash equivalent, it must be readily convertible to a known amount of cash and be subject to an insignificant risk of change in value. Therefore, an investment normally qualifies as a cash equivalent only when it has a short-maturity, of say, three months or less from the date of acquisition.
- Investments in shares are excluded from cash equivalents unless they are, in substance, cash equivalents: for example, preference shares of a company acquired shortly before their specified redemption date (provided there is only an insignificant risk of failure of the company to repay the amount at maturity).
- Cash flows are inflows and outflows of cash and cash equivalents. The flow of cash is said to have taken place when any transaction makes changes in the amount of cash and cash equivalents available before happening of the transaction.
- If the effect of the transaction results in the increase of cash and its equivalents, it is called an inflow (source) and if it results in the decrease of total cash, it is known as outflow (use) of cash.
Cash flows exclude movements between items that constitute cash or cash equivalents because these components are part of the cash management of an enterprise rather than part of its operating, investing and financing activities. Cash management includes the investment of excess cash in cash equivalents.
#Definition of Cash Flow Statements:
Cash flow statements a statement of changes in the financial position of a firm on a cash basis. It reveals the net effects of all business transactions of a firm during a period on cash and explains the reasons for changes in cash position between two balance sheet dates.
It shows the various sources (i.e., inflows) and applications (i.e., outflows) of cash during a particular period and their net impact on the cash balance.
According to Khan and Jain:
“Cash Flow statements are statements of changes in financial position prepared on the basis of funds defined as cash or cash equivalents.”
The Institute of Cost and Works Accountants of India defines Cash Flow statement as,
“A statement setting out the flow of cash under distinct heads of sources of funds and their utilization to determine the requirements of cash during the given period and to prepare for its adequate provision.”
Thus, a cash flow statement is a statement which provides a detailed explanation for the changes in a firm’s cash balance during a particular period by indicating the firm’s sources and uses of cash and, ultimately, the net impact on cash balance during that period.
The cash flow statement is intended to provide information on a firm’s liquidity and solvency and its ability to change cash flows in future circumstances provide additional information for evaluating changes in assets, liabilities, and equity improve the comparability of different firm’s operating performance by eliminating the effects of different accounting methods indicate the amount, timing and probability of future cash flows.
The cash flow statement has been adopted as a standard financial statement because it eliminates allocations, which might be derived from different accounting methods, such as various time-frames for depreciating fixed assets.