Understanding Cash Flow Statement

A cash flow statement is one of the other major financial statements that provide detailed information of companies’ cash transactions,i.e, receipts as well as payments.

The cash flow statement does not follow the accrual method. Like, as revenues are recorded in the income statements when they are earned, but in the case of cash flow statements, they are recorded only when cash gets collected.

Components of Cash Flow Statement-

It usually depicts cash generated or used in operating, investing and financing activities. Under operating activities, we analyse the cash transactions that took place due to company’s core business activities. Examples of such activities are receipts from sales of goods and services, interest and tax payments, payments made to suppliers, payments of salaries and wages, etc.

Under investing activities, we lay out the detailed information of companies’ investments like purchase and sale of fixed assets, etc. Whereas, under financing activities, we list out the sources of finance (cash) from banks, creditors and investors. Payments of dividends and interest too come under financing activities.

Importance of Cash Flow Statement

It generally helps to gauge the long-term success of any company. It is a very vital financial statement that helps to evaluate the company’s liquidity, solvency, and financial flexibility. It helps the investors to make better and more informed judgements. The creditors get to know whether the company has enough cash to meet their expenses as well as pay their debts.