What Is a Cash Flow Statement?
- A cash flow
statement (CFS) is a financial statement that summarizes the amount of
cash and cash equivalents entering and leaving a company.
- The CFS
measures how well a company manages its cash position, meaning how well
the company generates cash.
- The CFS
complements the balance sheet and the income statement.
- The main
components of the CFS are cash from three areas: operating activities,
investing activities, and financing activities.
- The two
methods of calculating cash flow are the direct method and the indirect
method.
How the Cash Flow Statement Is Used
The
CFS allows investors to understand how a company’s operations are running,
where its money is coming from, and how money is being spent. The CFS is
important since it helps investors determine whether a company is on solid
financial footing.
Creditors,
on the other hand, can use the CFS to determine how much cash is available
(referred to as liquidity) for the company to fund its operating
expenses and pay down its debts.
Structure of the Cash Flow Statement
The
main components of the cash flow statement are:
1.
Cash
from operating activities
2.
Cash
from investing activities
3.
Cash
from financing activities
4.
Disclosure
of non-cash activities, which is sometimes included when prepared
under generally accepted accounting principles (GAAP).
It’s
important to note that the CFS is distinct from the income statement and
the balance sheet because it does not include the amount of future incoming and
outgoing cash that has been recorded as revenues and expenses. Therefore, cash
is not the same as net income—which, on the income statement, includes
cash sales as well as sales made on credit.
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