It is among the 3 important financial statements (Balance Sheet and Income Statement)that are prepared by the corporations. The cash flow statement shows how much amount of cash is coming and how much amount cash is going out of the business.
In other words, the cash inflow and outflow of the business can be monitored with the help of a cash flow statement. This statement has huge significance for the management because through this statement they are able to manage the cash more efficiently.
For managing the Net cash flow of the business this statement is required.
Significance of cash flow statement
The cash flow statement has huge significance for the stakeholders of the business.
- The first importance of this statement is that it allows corporations to create various financial policies.
- The business can create different policies regarding the management of cash in the organization after reviewing the cash flow statement.
- The cash flow statement is reviewed by the investors and shareholders of the corporations to understand the current cash position of the company.
- The cash flow statement can be used for taking loans from banks or financial institutions.
- The financial institutions review the financial statements of the business before giving a loan.
The cash flow statement can be used by corporations for taking short-term financial decisions. If the corporation wants to improve its cash management then it can also use the cash flow statement to know how it can improve the cash management in the corporation.
Cash management has huge significance for daily operations. If the corporation is not going to maintain cash for its routine activities then different issues can arise. The corporation should have enough cash from which it can pay its short-term loans. A cash flow statement can identify the causes of low cash in the business.
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Cash flow statement components
The cash flow statement consists of three sections are Cash from operating activities, Cash from investing activities, and cash from financing activities.
Cash from operating activities
Cash from operating activities is the core business activity that is responsible for generating cash. From operations, the business generates cash.
The operating activities include net income, depreciation expense, increase in inventory, decrease in accounts payable, etc.
Through reviewing this section of the cash flow one can know whether the corporation’s operations are generating cash or not. The efficiency and productivity of the company operations can be known from operating cash flow.
If the corporations perform their operations effectively then there will be no problem in cash generation. If the company’s operations are facing issues then the cash will not be generated effectively and the overall profit of the business will decline.
Operations of the business can be improved by proper training of the employees and by reduces the costs of the corporations. The organization can also implement the latest technologies for improving the overall efficiency and productivity of the operations.
Overall it can be said that if the operations of the business are efficient then a significant amount of cash can be generated.
Cash from investing activities
The cash from investing activities includes all those activities that are associated with investing. The capital expenditure, lending money, and selling of investments are all included in investment activities related to Owner equity side in Balance sheet.
The corporations invest their income into different projects or assets so that they can gain returns. The corporations invest in different projects so that cash can be generated.
The cash which is earned from the investing activities is usually used for improving the current operations of the business. In other words, the cash generated is used for the betterment of the corporation.
Cash from financing activities
The cash from financing activities includes all those activities that are associated with financing. The corporations finance their assets through debt and by issuing the security.
The funding of the corporation’s activities is mainly done through the above discussed two methods. The shares are issued to the shareholders so that company can finance its activities. Debt is also taken for financing the assets. The dividend payment or the payment of the debt to the creditors are all included in the financing activities.
Cash flow statement methods
There is 2 method to prepare Cash Flow Statement as below:
- Direct methods
- Indirect methods
