What is Cash Flow Statement

In this Free Online Accounting Training Class on Cash Flow Statements you will learn:

  • What is a Cash Flow Statement or Statement of Cash Flows
  • What is meant by Funds Flow Statement
  • Formation of Cash Flow Statement
  • Sample Cash Flow Statement
  • Activities of Cash Flow Statement
  • Preparation of Cash Flow Statement

The cash flow statement is the most basic and significant financial statement of the accounting system. A cash flow statement is also known as a Statement of Cash Flows or Funds Flow Statement. It illustrates the major cash inflow and cash outflows of business. Investors and creditors are the most important users of the accounting system. They want to know the amount of cash inflows and cash outflows of any company. That means what amount of cash is coming in and what amount of cash is going out.

The statement of cash flows of any entity reports the cash inflows (receipts) and cash outflows (payments) of an entity during a particular accounting period of time, the time could range from a quarter or a month, or a year. The cash receive transaction could happen for various reasons or the company can receive cash through many operational activities of a business, for example: providing goods or services on cash or selling assets, the company also can receive cash through borrowing such as by borrowing from a bank, and also can be receiving cash from investments by owners.

Similarly, the cash payment transaction is occurred in companies for a variety of purposes for example: to pay operating expenses of the accounting period such as wages, utilities, and taxes; to purchase assets, to repay loans; and to pay their investors.

In order to evaluate past operational activities and to plan future investing and financing activities the cash flow statement is very beneficiary for the manager of any economic entity. It is also helpful to investors, creditors, and others to evaluate a firm’s profit potential. It is also a prime factor to assess a firm’s ability to pay its maturing debts.

In the statement of cash flows, there are three activities that categorized the individual cash flow items which are:

  • Operating Activities
  • Investing Activities
  • Financing Activities

Operating Activities: operating activities referred those activities which are related with the daily operating activities of any company. Selling goods or providing services are the main operating cash inflow activities of any economic entity which generates revenue. Purchasing inventory and paying wages, taxes, interest, utilities, rent, and related similar expenses are the prime operating cash outflows of any company’s operating activities. Operating activities reflect the net income of the business.

Investing Activities: Investing activities are those activities, which reflect the investment in noncurrent assets. The purchase and sale of land, buildings, and other equipment, are the vital investing activities of the business. Any activities that are related to buying and selling of long-term assets are considered investing activities.

Financing Activities: Financing Activities are a combination of those tasks by which cash is earned from or repaid to owners, creditors, or other financing firms. For example, cash received from owner™s investments, cash earnings from a loan, or cash payments to repay loans all are financing activities. The financing activities affect the debt and equity section of the entity.

Though these three activities are easily described in a cash flow statement the actual preparation of a cash flow statement can sometimes be difficult.

The cash flows from operating activities are basically recorded first, followed by the cash flows from investing activities and financing activities the statement of cash flows. The net cash increase or cash decrease for the accounting period results from the total net cash flow from these activities. The major relationships among the activities can be evaluated by reporting cash flows from operating, investing, and financing activities.

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