CashFlow Statement (CFS)

Hello Everyone,

Today we are going to talk about another financial statement called cash flow statement (CFS).

Let’s first agree on the definition of cash flow statement.

A cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities. The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent.

We have mentioned operating, investing and financing activities; let’s figure out what these activities are.

Operating Activities are the revenue generating activities of a business e.g., cash received and disbursed for product sales, royalties, commissions, fines, lawsuits, supplier and lender invoices, and payroll fall under operating activities category.

Investing Activities constitute of payments made to acquire long-term assets, as well as cash received from their sale. Activities like purchase or sale of securities of other entities, purchase of fixed assets fall under investing activities.

Financing Activities are the ones that alter the equity or borrowing of a business. Some examples are sale of company shares, re purchase of shares, dividend payments.

Here is a format for CFS that can present the cashflows of a business for a year.

Uses of Cash Flow Statements

Here are a few ways the statement of cash flows is used.

1.     provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances

2.     provide additional information for evaluating changes in assets, liabilities and equity

3.     improve the comparability of different firms' operating performance by eliminating the effects of different accounting methods

4.     indicate the amount, timing and probability of future cash flows

This is all about today's post. we will discuss CFSs in more detail in some other blog.

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