Statement of Cash Flows
In Financial Accounting, a cash flow statement also known as statement of cash flows, it 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. 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. As an analytical tool, the statement of cash flows is useful in determining the short term viability of a company.
Purpose of preparing cash flow statement
The income statement focuses on the economic results of the entity’s operating activities during a period. Key concepts in the measurement of the period’s income are revenue recognition and the matching of expenses. Revenue is recognized in the period in which the entity performs its revenue-generating tasks. The purpose of statement of cash flow is to provide information about the cash flows associated with the period’s operations and also about the entity’s investing and financing activities during the period. This information is important to shareholders and lenders.
Uses of cash flow statements for future planning
The purpose of analyzing cash flow statements is not solely to understand what has happened in the past. In addition, this analysis serves as a means of projecting what cash flows may look like in the future. A projected cash flow statement is an essential device for planning the amount, timing and character of new financing. These projections are important both to management in anticipating future cash needs and to prospective lenders for appraising a company’s ability to repay debt on the proposed terms. For shorter term financial planning, cash flow projections are made for each of the next several months or several quarters. This cash budget is useful in anticipating seasonal financing needs.
The statement cash flow includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments. Effective cash utilization is very essential for the success of any Organization. The expert consultants at Emirates Chartered Accountants Group assist the clients for implementing a better utilization of the cash. For more information email us to email@example.com