Professional Documents
Culture Documents
Concept of Cash Flows Statement
Concept of Cash Flows Statement
This statement reports cash inflows and outflows based on the firm’s operating activities, investing
activities, and financing activities during an accounting period. In other words, this report shows what
activities generated money and what activities spent money during the course of the period. A cash flow
statement is a financial report that tells the reader the source of a company’s cash and how it was spend
over a specific time period. This is an important indicator of financial soundness because it is possible for
a company to show profits while not having enough cash to sustain operation. The cash flow statement
also tell s the reader how much money was spent for items that do not appear on the income
statement, such as loan repayments, long term assets purchases and payment of cash dividends.
Operating activities: The operating cash flows are cash flows directly related to sales and
production of the firm’s products and services. Example: produce sales, commission, supplier
and lender payment and payroll.
Investing activities: The investment cash flows are cash flows associated with acquire or
purchase long term fixed assets as well as cash received from their sales.
Financing activities: The financing cash flow is cash flow that results from debt and equity
financing transactions. Example: The sale of company share, the repurchase of share and
dividend paid.
i. To report on the cash receipts and cash disbursements of an entity during a financial year.
i. To report on the entity’s operating, investing and financing activities for the period.
Cash flow statement helps to identify the sources from where cash inflows have arisen within a
particular period and also shows the various activities where in the cash was utilized.
Cash flow statement is significant to management for proper cash planning and maintaining a
proper matching between cash inflows and outflows.
Cash flow statement shows efficiency of a firm in generating cash inflows from its regular
operations.
Cash flow statement reports the amount of cash used during the period in various long-term
investing activities, such as purchase of fixed assets.
Cash flow statement reports the amount of cash received during the period through various
financing activities, such as issue of shares, debentures and raising long-term loan.
Cash flow statement helps for appraisal of various capital investment programs to determine
their profitability and viability.
It helps the internal management to determine the financial policy to be adopted in future since
it supplies information relating to funds, e.g., taking decision about the replacement of fixed
assets or repayment of long- term liabilities etc.
i. Management:
To see the effects of its past major policy decisions in quantitative form.
To know whether a flow of cash from operating activities large enough to finance all projected
capital needs internally rather than having to incur long-term debt or issue additional stock.
In case of cash shortage, management can use this statement to determine why such shortages
are occurring.
ii. Investors & Creditors: It assists investors, creditors, and others to assess the following:
Reasons for differences between net income and associated cash receipts & payments.
Effects on an enterprise’s financial position of both its cash and non-cash investing and financing
transactions during the period.
These cash flows are generally the cash effects of transactions that enter into the determination of net
income.
Cash Inflows
Cash Outflows
These cash flows show the impact of buying and selling fixed assets and debt or equity securities of
other entities.
Cash Inflows
Cash Outflows
Shows impact of all cash transactions with shareholders and the borrowing and repaying transactions
with lenders.
Cash Inflows
i. Borrowing
Cash Outflows
i. Repayment of debt.
ii. Repurchase of treasury – stock.
iii. Cash dividend.
Preparation of Cash Flows Statement
………………………..
Statement of Cash Flows
For the Year …………