In terms of
accounting the official name of the cash flow statement is the Statement of
Cash Flows. This statement is one of the major financial statements just like
the balance sheet and the income statement. The cash flow statement depicts the
amount of cash generated and used during a specific period of time. The period
of time for which a cash flow statement is made is specified in the heading of
the statement. The specific interval of time covered by the cash flow statement
is chosen by the firm itself. There are a number of categories in which a cash
flow statement shows the generation and the usage of the cash. These categories
include the operating activities, investing activities, financing activities and
supplemental information of these activities. A cash flow statement is
considered to be the mandatory part of company financial reports since year
1987.
A cash flow
statement records the amount of cash and cash equivalents entering and leaving
a firm at a specific time interval. It can be used as a tool by the investors
to understand the operations of a company. It shows from where a company is
getting money and how the money is spent on the various operations of the
company. It also shows the transformation in the cash and cash equivalents over
a specific period of time. Cash flow statement does not include items that are
non-cash based for example a cash flow statement will not include depreciation
in it. The cash flow statement is used to measure the viability of a company to
pay its short term obligations such as short term bills etc. The flow of cash
in either direction is very important for the financial analysis of a company
so it is recommended for the managers to analyze and study the cash flow statement
on quarterly bases.
The cash
flow statement is somewhat similar to the income statement of a company however
the income statement also adds some non-cash entities in it such as
depreciation etc. the cash flow statement strip away the non-cash items and
just show the actual cash generated by the company. The statement also shows
the efficiency of the management in managing the cash inflows and cash outflows
of a company. With the help of cash flow statement a company can calculate its
operating cash flow ratio which is the measure of the ability of the company to
pay its short term loans and interest payments of that period of time.
