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  • Writer's pictureSANJANA JEVRANI

Cash Flow Statement: What It Is and Its Types?


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The Cash Flow Statement tracks how cash moves in and out of a business over a specific period. It has three main sections: Operating Activities, Investing Activities, and Financing Activities. Analyzing this statement helps investors and stakeholders understand a company's ability to generate cash, manage investments, and handle financial obligations.


 

What is the meaning of cash flow statements?


The Cash Flow Statement is one of the primary financial statements used by businesses to assess their financial health. It provides valuable insights into how cash is generated and used by a company during a specific period. Unlike the income statement and balance sheet, which mainly focus on profitability and the company's financial position at a specific point in time, the cash flow statement emphasizes cash inflows and outflows over a given period.


What are the types of cash flow statements?


  1. Operating Cash Flow (OCF): This section shows the cash generated or used by a company's core operating activities. It includes cash received from customers and cash paid for expenses like salaries, utilities, and taxes.

  2. Investing Cash Flow (ICF): This part illustrates the cash flow resulting from investment activities, such as buying or selling property, plant, equipment, or investments in securities like stocks and bonds.

  3. Financing Cash Flow (FCF): Here, the cash flows related to financing activities are recorded. This includes cash received from issuing or repaying debt, issuing or buying back shares, and paying dividends.

 

Structure of the cash flow statements


Operating Activities:


  • This section starts with the net income from the company's income statement.

  • It then adjusts for non-cash items such as depreciation and amortization.

  • Changes in working capital accounts (such as accounts receivable, accounts payable, and inventory) are accounted for.

  • Other operating activities, including interest received and paid and taxes paid, are included.

  • The result is the net cash provided or used by operating activities.

Investing Activities:


  • This section includes cash flows related to the purchase and sale of long-term assets, such as property, plant, and equipment.

  • It accounts for investments in securities such as stocks and bonds, as well as proceeds from the sale of these securities.

  • Cash flows from loans made to third parties or received from the repayment of loans are also included.

  • The net cash used in or provided by investing activities is calculated.

Financing Activities:


  • Financing activities involve cash flows related to the company's capital structure.

  • This section includes proceeds from issuing stocks or bonds and cash payments for repurchasing them.

  • Cash flows from borrowing or repaying loans are accounted for.

  • Dividends paid to shareholders are included.

  • The net cash provided by or used in financing activities is determined.

 

Cash flow statement vs. Income statement vs. Balance sheet

Aspect

Balance Sheet

Income Statement

Cash Flow Statement

Purpose

Provides a snapshot of financial position at a specific point in time

Reports financial performance over a specific period

Tracks cash inflows and outflows during a specific period

Timing

Prepared at the end of a reporting period

Prepared for a specific period (e.g., quarter, year)

Prepared for a specific period (e.g., quarter, year)

Components

Assets, Liabilities, Equity

Revenues, Expenses, Net Income/Loss

Operating, Investing,Financing Activities

Equation

Assets = Liabilities + Equity

Revenues - Expenses = Net Income/Loss

Operating Cash Flow + Investing Cash Flow + Financing Cash Flow = Change in Cash

Focus

Financial position

Financial performance

Cash flow movements

 

Benefits & limitations of the cash flow statement


Benefits


1. Highlights Liquidity: The Cash Flow Statement shows cash movements for operations, investments, and financing, aiding in assessing a company's liquidity.

2. Reflects Actual Cash Movements: The Cash Flow Statement omits non-cash items, providing a clear view of cash transactions for stakeholders' understanding.

3. Assists in Financial Planning: Businesses use Cash Flow Statements to predict future cash flows, identify surpluses or shortfalls, and make informed financial decisions.


Limitations


1. Doesn't Consider Non-Cash Transactions: The Cash Flow Statement's focus on cash may miss non-cash items like depreciation, affecting financial analysis completeness.

2. May Mask Financial Problems: Positive cash flow doesn't assure financial health; it can be manipulated, impacting profitability and sustainability assessment.

3. Limited Predictive Value: The Cash Flow Statement assesses past and present cash flows but has limited predictive accuracy due to changing factors.

 

Conclusion


In conclusion, the Cash Flow Statement is a vital tool for assessing a company's financial health. It provides valuable insights into cash movements, liquidity, and operational efficiency. While it offers transparency and aids in decision-making, its limitations underscore the importance of comprehensive financial analysis. Understanding and interpreting the Cash Flow Statement can empower stakeholders to make informed decisions and navigate the complexities of financial management effectively.

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