what does a cashflow statement describe? and what does make it compulsory for any business?
A cashflow statement is an analysis that shows how changes in income and balance accounts affect cash and cash equivalents.
The analysis report is also broken down into operating, investing, and financing activities. These reports are crucial because it allows a company to develop strategic plans in order to predict what will happen to revenue in certain if-then situations.
Cashflow statement shows us the real cash inflow and outflow of the funds. If you see at the net profit of the company the profit figure may include cash and as well as non cash items (like depreciation etc.), but it doesnot present the cash in hand with the company.Hence company or organization requires the only cash inflows and outflows to manage the day to day activities.
Thus they prepare the cash flow statement to analyze the real cash inflow and outflow to make financial decision accordingly. As per some countries norms it is mandatory to prepare the cash flow statement.
Cashflow statement can be prepared in direct and indirect manner. Generally it is preferred to prepare in indirect form, in which the cash flows are divided in three categories.
Operating cash flow (here the general day to day activity of the organization details are captured by removing non cash items)
Investing cash flow (here the investing of the cash by the organization is taken into consideration)
Financing cash flow (here the organizations financing decisions are taken into consideration)
Positive cash flow indicates the organization is maintaining healthy cash balance and it can meet its day to day requirements and also can fund the projects effectively, without any defaults or discrepancies.
Dear Sir,
Cash flow is the tools by which we can analyze what is opening balance of cash and cash equivalent . what is cash inflow during the certain period and what is cash out flow during the certain period.
opening + inflow – outflow = net flow = closing balance of cash and cash equivalent.
this is very helpful to plan and manage your business activity along with budgetry control and AP control, AR control.
A cashflow statement describes all the inflows and outflows a company has generated/suffer during an accounting period (usually quarterly). Cash is finally what investors will get as a return on investment and that is why Cash Flow statement is so important and compulsory: It will give an insight of the company capacity to generate cash and therefore returns to investors.
Furthermore, the company value is no more than the future cash flows that it is expected to generate. Also called net present value, is no more than all the future cash streams that the company could generate in the future, they are all discounted at a “discount rate”. Please let me know if you have any further comments or questions.
Antonio
Basically a cash flow statement is a report of your cash inflow and outflow which gives the information about flow of cash i.e. What is the opening balance of cash, sources of cash inflow during the years, where cash is used.
This statement has three parts:
Cash flow from operating activities (CFOA)
Cash flow from investing activities (CFIA)
Cash flow from financing activities (CFFA)
You can clearly analysis the cash inflow and outflows from these three segments i.e. Cash inflow from issue of shares (CFFA) is used to purchase Machines (CFIA).
This information is very relevant for business organizations to see the optimal utilization of thier cash resources.
