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Concept
Cash flow statement
Summary
In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7) is the International Accounting Standard that deals with cash flow statements.
People and groups interested in cash flow statements include:
Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses
Potential lenders or creditors, who want a clear picture of a company's ability to repay
Potential investors, who need to judge whether the company is financially sound
Potential employees or contractors, who need to know whether the company will be able to afford compensation
Company Directors, who are responsible for the governance of the company, and are responsible for ensuring that the company does not trade while insolvent
Shareholders of the company.
The cash flow statement (previously known as the flow of funds statement), shows the sources of a company's cash flow and how it was used over a specific time period. It is an important indicator of a company's financial health, because a company can report a profit on its income statement, but at the same time have insufficient cash to operate. The cash flow statement reveals the quality of a company's earnings (i.e. how much came from cash flow as opposed to accounting treatment), and the firm's capacity to pay interest and dividends.
The cash flow statement differs from the balance sheet and income statement in that it excludes non-cash transactions required by accrual basis accounting, such as depreciation, deferred income taxes, write-offs on bad debts and sales on credit where receivables have not yet been collected.
Official source
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