Introduction to Cash Flow Statement
The official name for the cash flow statement is the statement of cash flows. We will use both names throughout AccountingCoach.com.
The statement of cash flows is one of the main financial statements. (The other financial statements are the balance sheet, income statement, and statement of stockholders' equity.)
The cash flow statement reports the cash generated and used during the time interval specified in its heading. The period of time that the statement covers is chosen by the company.
The cash flow statement organizes and reports the cash generated and used in the following categories:
1.Operating activities
2.Investing activities
3.Financing activities
4.supplemental activities
What Can The Statement of Cash Flows Tell Us?
Because the income statement is prepared under the accrual basis of accounting, the revenues reported may not have been collected. Similarly, the expenses reported on the income statement might not have been paid. You could review the balance sheet changes to determine the facts, but the cash flow statement already has integrated all that information. As a result, savvy business people and investors utilize this important financial statement.
Here are a few ways the statement of cash flows is used:
1.The cash from operating activities is compared to the company's net income. If the cash from operating activities is consistently greater than the net income, the company's net income or earnings are said to be of a "high quality". If the cash from operating activities is less than net income, a red flag is raised as to why the reported net income is not turning into cash.
2.Some investors believe that "cash is king". The cash flow statement identifies the cash that is flowing in and out of the company. If a company is consistently generating more cash than it is using, the company will be able to increase its dividend, buy back some of its stock, reduce debt, or acquire another company. All of these are perceived to be good for stockholder value.
3.Some financial models are based upon cash flow.
