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Overview of Cash Flow Statement
Definition of
Cash Flow Statement
What is a Cash Flow Statement? The Cash Flow Statement, also known as the Statement of Cash Flows, is one of the three primary financial statements produced by a business, along with the Balance Sheet and Income Statement. Its main purpose is to provide a detailed summary of the cash inflows (receipts) and cash outflows (payments) that occurred within a company during a specific accounting period. It effectively shows how changes in balance sheet accounts and income affect cash and cash equivalents. The statement breaks down cash flow into three distinct categories: Operating Activities, Investing Activities, and Financing Activities. Ultimately, it reconciles the beginning and ending cash balances reported on the Balance Sheet.
Activities Related to
Cash Flow Statement
Here is a list of Cash Flow Statement related activities:Â
Preparing period-end financial reports, Analyzing cash generated from core operations, Evaluating cash spent on long-term assets (investing), Assessing cash flows from debt and equity financing, Reconciling net income to operating cash flow (using the indirect method), Performing cash flow analysis to assess liquidity, Making financing and investment decisions based on cash impacts.
These activities involve the creation, interpretation, and application of the Cash Flow Statement.
The Importance of
Cash Flow Statement
The Cash Flow Statement is extremely important for small business owners, creditors, and investors because it shows the actual movement of cash, which is crucial for assessing a company's short-term viability and ability to pay its bills. Unlike the Income Statement, which can include non-cash revenues and expenses under Accrual Accounting, the Cash Flow Statement focuses solely on cash. It helps answer key questions like: Is the company generating enough cash from its operations? How is the company financing its growth? Can the company meet its debt obligations? Understanding these cash movements is vital for managing liquidity, making sound financial decisions, and ensuring the business remains solvent. Accurate bookkeeping provides the data needed to generate this statement, often included in standard financial reporting.
Key Aspects of
Cash Flow Statement
Focus on Cash & Equivalents
Tracks only the inflows and outflows of cash and highly liquid assets considered cash equivalents (like short-term money market accounts).
Three Activity Sections
Categorizes all cash movements into Operating (day-to-day business), Investing (long-term assets), and Financing (debt, equity, dividends) activities.
Reconciliation Role
Explains the change in the cash balance reported on the Balance Sheet from the beginning to the end of the period and links net income to actual operating cash generated.
Concepts Related to
Cash Flow Statement
The Cash Flow Statement is one of the main Financial Statements. It details the sources and uses underlying the net change in Cash Flow, composed of Cash Inflows and Cash Outflows. It complements the Balance Sheet and Income Statement, often reconciling Net Income (accrual basis) to operating cash flow. It's the primary tool for Cash Flow Analysis and assessing Liquidity. View an example Cash Flow Statement here.
Cash Flow Statement
in Action:
The Adventures of Coco and Cami
Follow the entrepreneurial journeys of Coco, who's opening a sandwich shop, and Cami, starting a coffee shop, as they find themselves faced with the new challenges of bookkeeping to track their businesses.
Watch as Professor A breaks down the fundamental concepts of bookkeeping for Coco and Cami, explaining why it's the essential foundation for understanding a business's financial health.