Describing statement of cash flows

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Statement of Cash Flows

A Statement of Cash Flow is a statement which shows inflow and outflows of cash and cash equivalents of an enterprise during a particular period. It provides information about cash flows, associated with the period’s operations and also about the entity’s investing and financing activities during the period. Cash flow statement is generally used as a tool of financial analysis which is utilized by the management for short-term financial analysis and cash planning purposes, whereas funds flow statement is useful in planning intermediate and long-term financing. “The Statement of Cash Flows is a change statement summarizing the transactions that caused cash to change during the period (Spice land et al, 2011). Investors use cash flows numbers to put a value on a company.

The Statement of Cash Flows is important for understanding the true cash flows of the business. It restates the firm’s flow of funds from an accrual accounting basis to a cash accounting basis. As such, it eliminates all non-cash revenues and expenses recorder by accrual accounting in order to see how management has employed resources during the period.

The Statement of Cash Flow shows the net change in the position of cash and cash equivalents. It is prepared based on past data from the Income Statement and the Balance Sheet. It classifies and highlights the cash flows into three categories: operating, investing and financing. “This document projects what your business plan means in terms of dollars”, “is used for internal planning” and shows “both how much and when cash must flow in and out of the business” (Safranski and Kwon, 1991).

As an operating tool, the cash flow statement provides information about cash generated from operating activities and explanations for the difference between net profit and cash from operations.

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Reference no: EM1310211

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