Cash Flow Statement:
The cash flow statement is a financial statement that summarizes the amount of cash and cash equivalents flowing in or out of the company during a specified period. It provides the information regarding the sources and uses of cash and cash equivalents.
Objectives of cash flow statement:
One of the major objectives and benefits of a cash flow statement is to inform the users of financial statements about the cash flows of the company.
The cash flow statement measures how well the company generates cash to pay its debt obligations and fund its operating expenses. The cash flow statement is also used by various stakeholders to determine the potential of the company to generate funds.
Also, it is a mandatory part of a company’s financial report. Inflow and outflow of cash and cash equivalents of a company during a specific period is shown in a cash flow statement.
Benefits of cash flow statement:
Some of the benefits of cash flow statement are given below –
- Tracks cash flow – Measurement of inflows and outflows of cash which can be measured annually which arise from operating activities, investing activities and financial activities. This helps in analyzing and interpreting various inflows and outflows of cash from different sources.
- Assessment of profitability – It helps assessing liquidity and solvency position of a company/firm as timing and certainty of cash generation is known. This further ensures the investors, creditors and other parties who have invested funds in the company or to whom the company owes a certain amount, the security of their funds.
- Easy comparisons can be made – Since the format used by all the companies in the industry is pre-defined it becomes easier to compare and performance of different companies as there is no difference in accounting treatment of transactions.
- Helps in planning – It helps the management to prepare its cash planning for future so that they can avoid unnecessary troubles.Evaluation of future cash flows whether it is sufficient to meet various payments eg. Payment of expenses/debts/dividends/taxes.
- Better understanding of financial structure – Cash flow statement when accompanied with Balance Sheet and Profit and Loss accounts helps the user in better evaluations of the working and results of the company. This prepares them for the changing situations.
Thus, a cash flow statement keeps track of cash and cash equivalents of a company generated through operating activities, investing activities and financial activities.