The cash
flow statement tells the actual amount of collected revenues in terms of cash.
Since the income statement is prepared on the bases of accrual accounting it
may not tell the exact value of the revenue generated by a firm and in the same
way income statement show some expenses that are not paid in reality. Cash flow
statement is applied to find out the actual generated cash and actual cash that
are spent in different activities of the firm. Due to the above mentioned
usefulness cash flow statement is reviewed by the investors and businessmen to
get an idea of financial position of the firm on the bases of cash.
The cash
generated for the operating activities of the cash flow statement is used to compare
to the net income of the firm if this cash is greater than the net income the
earnings of the company are considered to be of high grade. For the investors
that believe that cash is king cash flow statement is a tool to show cash
inflow and outflow from a company. It also shows that if a company is able to
increase its dividend as a company that generates more cash is able to increase
the amount of dividends for the share holders. The cash flow statements also
show the ability of a company to pay its debt, reduce loan or to acquire
another company on the bases of its cash generation. In some firms the future
financial modals of a company are based on the information acquired from the
cash flow statement.
Cash flow
statement can also be used to predict the future cash flows of a company. It
also helps in crafting and designing the budget of a company on the bases of
generated cash.
