Cash flow statement is a statement showing all cash inflows and how the organization applied these cash during a particular period of time. It is a tool for finance managers for decision making. The cash flow statement is prepared by comparing the financial statement of two different periods. It will help the finance managers’ to analyses the movement of cash in the organization.
As the primary purpose of the cash flow statement is to provide all required information about the cash inflow and outflow, the statement should reveal information about the receipt and payment from Operating, Investing and Financing activities of the transition
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Use of Cash Flow Statement
Is it just for time pass ?? !!!!!……Not at all…!!! Many reasons are there to prepare a cash flow statement. What all are they?
- The economic value of an asset is derived on the basis of its ability to generate future cash flows.
- Normal profit and loss account shows a profit, it is based on an accrual method of accounting. But profit and the cash from business activities are not the same
- Retained Profit is used for innovation of the business, but retained earning without enough cash inflow, unable to reinvest for an innovative project
Much more reason also there depends on nature, industry, the product of the company
Types of Cash Flow in Business
There are mainly three types of business activity viz. Operating Activity, Investing Activity and financing activity
1. Operating Activity
Cash flow from operating activities is the principal revenue-producing activities of the organisation. They generally result from the main business activity of the organisation
Eg:- Cash payment to suppliers for goods and services, cash payment to employees, government for tax, fine duties, other fees or penalties, payment of interest on debt also
2. Investing Activity
Investing activities are activities of investing in resources to generate cash in the future.
The below chart will help you to have a clear understanding of the concept of cash flow from investing activities.
3. Financing Activities
Cash flow from financing activities includes the cash effects relate to issuance, settlement, or acquisition of the entities debt and equity instruments
To learn more about a creative cash flow reporting, you can refer the book Creative Cash Flow Reporting, Uncovering Sustainable Financial Performance.