For users of financial statements, information about profitability is not the only thing to be looked at. Information about the cash flows is also very important to assess an entity’s ability to generate cash, its short term and long term cash utilization needs, its liquidity and solvency etc. This is where the statement of cash flows comes in.
Statement of cash flows or cash flow statement is the fifth and the last statement of the complete set of financial statement. This statement provides information about the cash flows or cash movements during an accounting period. For better analysis of users, these cash flows are presented in three categories, namely:
- Cash flows from operating activities (Operating activities are the main revenue generating activities and those activities that do not fall under the category of investing or financing activities).
- Cash flows from investing activities (Investing activities include the acquisition and disposal of long-term assets and investments).
- Cash flows from financing activities (Financing activities represent the addition or reduction of capital or finances of an entity such as increase or decrease in equity, obtaining a loan or repayment of loan etc.).
What are cash flows?
Cash coming into the business (receipts) or going out of the business (payments) is called cash flows. Basically, cash and cash equivalents is the comprehensive term that includes
- Cash: cash in hand, cash at bank, demand drafts. and
- Cash equivalents: short term highly liquid investments
Cash flows or cash movements are the movements of cash and cash equivalents into the business (inflows) and movements out of the business (outflows). The statement provides details of these cash flows during an accounting period, and at the end of the statement, a reconciliation of cash and cash equivalents is also presented showing the following:
- Cash and cash equivalents at the beginning of an accounting period.
- Net cash flows during an accounting period.
- Cash and cash equivalents at the end of an accounting period.
Here is a sample statement of cash flows for you.