Purpose Of Cash Flow Statement

by Jeremy

Purpose of Cash Flow Statement, please help me to understand it

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Oct 28, 2009 Purpose Of Cash Flow Statement Explained by: Ana Orwel Exploring the purpose of cash flow statement first of all we need to understand what is cash flow statement. This is one type of the financial statements, which shows sources of cash inflow into the business and show for what reasons the business spends cash. Therefore the purpose of cash flow statement is closely related to the data which is indicated on this statements. We need this statement to get additional information whether the business is able to generate enough cash from its ordinary operating activities and how efficiently this cash is being used to expand activities, repay loans or pay dividends to the shareholders. It is important to understand that if we analyze only balance sheet and income statement, in these two financial statements we will see net income for the period and balance of cash as of the year end. However these financial statements will not indicate whether the business generated enough cash from main operations and what were the main sources the business got cash from. Due to the accrual accounting method applied, when revenues and expenses are recognized as are earned and incurred, but not when cash is received or paid, therefore the business can be profitable, but not able to generate enough cash. Cash flow statement will show this. This statement consists of three main parts: 1. cash flow from operating activities ? showing cash generated from the main activities of the business. The part is essential and will show whether the business get most of cash from main operations. If not, viability of business might be questionable. 2. cash flow to (from) investing activities ? cash spent to acquire new fixed assets and investments. If these items are being sold and such sales are not related to disposal of old non-used assets, this might also be an issue, since we can find out that the activities of business are being financed by the cash received from selling of fixed assets, but not from the main activities 3. cash flow to (from) financing activities ? this part will show repayment of debt or receipt of debt. It can indicate whether the business was repaying its debt or borrowing more to finance its activities. So the purpose of cash flow statement is to specify in details change in cash balance during the year. X Close Editor Oct 28, 2009 Rating Submitted by: Ana Orwel Title Comment Exploring the purpose of cash flow statement first of all we need to understand what is cash flow statement. This is one type of the financial statements, which shows sources of cash inflow into the business and show for what reasons the business spends cash. Therefore the purpose of cash flow statement is closely related to the data which is indicated on this statements. We need this statement to get additional information whether the business is able to generate enough cash from its ordinary operating activities and how efficiently this cash is being used to expand activities, repay loans or pay dividends to the shareholders. It is important to understand that if we analyze only balance sheet and income statement, in these two financial statements we will see net income for the period and balance of cash as of the year end. However these financial statements will not indicate whether the business generated enough cash from main operations and what were the main sources the business got cash from. Due to the accrual accounting method applied, when revenues and expenses are recognized as are earned and incurred, but not when cash is received or paid, therefore the business can be profitable, but not able to generate enough cash. Cash flow statement will show this. This statement consists of three main parts: 1. cash flow from operating activities ? showing cash generated from the main activities of the business. The part is essential and will show whether the business get most of cash from main operations. If not, viability of business might be questionable. 2. cash flow to (from) investing activities ? cash spent to acquire new fixed assets and investments. If these items are being sold and such sales are not related to disposal of old non-used assets, this might also be an issue, since we can find out that the activities of business are being financed by the cash received from selling of fixed assets, but not from the main activities 3. cash flow to (from) financing activities ? this part will show repayment of debt or receipt of debt. It can indicate whether the business was repaying its debt or borrowing more to finance its activities. So the purpose of cash flow statement is to specify in details change in cash balance during the year. Cancel Delete Delete & Ban Updating Comments page...

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