What does the Statement of Cash Flows mean? In accounting, a statement of cash flows, also known as the cash flow statement, 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. Explanation of Statement of Cash Flows with Objectives. The statement of cash flows is one of three very important financial reports that managers and investors look at when analyzing a company’s past or present financial status.
Know and Understand the Concept of the Statement of Cash Flows.
The balance sheet and the income statement are the other two reports. All of these reports are very important in running a successful business, but the statement of cash flows is the most important. It is like the blood of a company since it would not survive successfully without it. Cash on hand can actually be much more important than income, profits, assets, and liabilities put together, especially in the early stages of any company.
The statement of cash flows tells us how much cash we have on hand after all costs are met. It shows how much cash we started with and how much we pay out. There are two parts to the statement of cash flows which are the top and bottom halves. The top half deals with the inflow and outflow of the company’s cash. The bottom half of the statement reports where the funds end up. Just like the balance sheet, the top and bottom halves of a cash flow statement match.
Knowing just how important it is to have cash on hand to pay the bills we want to make sure and review cash flow statement regularly. Cash flow is a little more honest than an income statement because the cash flow statement shows money coming in only when we actually deposit it and money going out only when we physically write out a check. Because the statement of cash flows reflects the actual receipt of cash, no matter where it comes from, the entries are a bit different from the revenue shown in a company’s income statement.
These funds are usually made up of gross receipts on sales, dividend and interest income, and invested capital. Gross receipts on sales represent the total money that we take in on sales during the period. Gross receipts are based on our gross revenue, of course, but they also take into account when you actually receive payment. Dividend and interest income is the income that we receive from savings accounts and other securities.
This is one of those amounts that are also reported on the income statement and should be the same as long as we actually receive the money during the period covered by the cash flow statement. Invested capital is part of the owner’s equity in the balance sheet. Although it does not represent revenue from our business operations and would not be part of the income statement, it can be a source of cash for our company. The statement of cash flows keeps track of the costs and expenses that incur for anything and everything.
Some of the expenses appear in the income statement and some don’t because they don’t directly relate to our costs of doing business. These funds consist of the cost of goods produced, sales, administration, interest expense, taxes etc. The cost of goods produced is exactly that, the cost incurred to produce our product or service during the period. Sales expenses are the same expenses that appear in an income statement except that paying off bills or postponing payments may change the amounts. On to the bottom half of the statement of cash flows which shows where money is ending up.
When the company’s cash reserves raise the money flows into one or more of asset accounts. The bottom half of the cash flow statement keeps track of what is happening to those accounts. This part of the statement consists of changes in liquid assets and net change in cash position. With cash flowing in and out of the company, liquid assets are going to change during the period covered by the cash flow statement. The items listed in this portion of the cash flow statement are the same ones that appear in the balance sheet. Raising the level of our liquid asset accounts has the effect of strengthening the cash position.
Cash flow analysis:
In order to properly construct a cash flow analysis, we have to look at three very important activities which are operating, investing and financing.
- Operating activities are the cash components that are generated from the sales of the companies goods or products affecting the core business operation. These include the purchase of raw materials, production costs, advertising cost and even the delivery to customers.
- Investing activities are straight forward items that report adjustments in the balances of fixed asset accounts like equipment, buildings, land, and vehicles. Investing activities include making and collecting loans and acquiring and disposing of investments and property, plant and equipment.
- Financing activities are cash adjustments to fixed liabilities and owners’ equity. Cash increases when the company takes up a loan or raised capital when dividends are paid out, cash decreases accordingly. Financing activities involve liabilities and owner’s equity items. They include obtaining resources from owners and providing them with a return on their investments and borrowing money from creditors to repay the amounts borrowed.
#Objectives of the statement of cash flows:
There are a few main objectives of the statement of cash flows one of which is to help assess the timing, amounts and the uncertainty of future cash flows. This is one of the quarterly financial reports that publicly traded companies are required to release to the public. Because public companies tend to use accrual accounting, the income statements they release each quarter may not necessarily reflect changes in their cash positions.
The statement of cash flows is very important to businesses because it helps investors see where the company can benefit from better cash management. There are many profitable companies today that still fail at adequately managing their cash flow so it is important to be able to see where the weaknesses are in order to correct them.
In conclusion, the statement of cash flows is very important for companies and people that want to invest in a certain company. It shows how well a company manages its cash in-comings and outgoings as well as showing how profitable a company might be or become.
It is a very clear document to understand so that we don’t fall victim to making a profit while still going broke. It is also helpful for the companies finance department so that they can see where the company stands in order to get more potential investors. It is a great resource to look at in order to recap a company’s financial standing that most people are able to understand.
What does Financial Statements mean?
A firm communicates to the users through financial statements and reports. The financial statements contain summarized information of the firm’s financial affairs, organized systematically. Preparation of the financial statements is the responsibility of top management. They should be prepared very carefully and contain as much information as possible.
Two basis financial statements prepared for external reporting to owners, investors, and creditors are:
Balance sheet contains information about the resources and obligations of a business entity and about its owner’s interests in the business at a particular point of time. In accounting’s terminology, balance sheet communicates information about assets, liabilities and owner’s equity for a business firm as on a specific date. It provides a snapshot of the financial position of the firm at the close of the firm’s accounting period.
Profit and loss account:
The profit and loss account presents the summary of revenues, expenses and net income (or net loss) of a firm for a period of time. Net income is the amount by which the revenues earned during a period exceed the expenses incurred during that period.
More information is required for planning and controlling and therefore the financial accounting information is presented in different statements and reports in such a way as to serve the internal needs of management. Financial statements are prepared from the accounting records maintained by the firm.
The various objectives of financial statements are:
- To provide reliable financial information about economic resources and obligations of a business enterprise.
- To provide reliable information about changes in the resources of an enterprise that result from the profit-directed activities.
- To provide financial information that assists in estimating the earning potential of the enterprise.
- To provide other needed information about changes in economic resources and obligations.
- To disclose, to the extent possible, other information related to the financial statement that is relevant to statement users.