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Why is the cash flow statement indispensable?

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created by person Aisha Mahmoud | June 21, 2018 17:38



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Olufemi Adeniran comments (1), replies (0)
04/07/2018 20: 55
Let me begin with the meaning of cash flow: cash flow is the money (cash) that flows in and out of a business. A good cash flow is crucial to any business as it keeps the business up and running. It will enable the business to pay off debts, pay its expenses, purchase new assets and even expand its operation. Now, the cash flow statement (also referred to as statement of cash flow) is a consolidated report of a business’ cash inflow and outflow at a given time. Cash flow statement is one of the main financial statements (it is used in tandem with the income statement, balance sheet and statement of shareholders’ equity). The cash flow statement organizes and reports the cash generated and used in the following categories: Operating activities – converts the items reported on the income statement from the accrual basis of accounting to cash. Investing activities – reports the purchase and sale of long-term investments and property, plant and equipment. Financing activities – reports the issuance and repurchase of the company’s own bonds and stock and the payment of dividends. It shows how changes in balance sheet accounts and income affect cash and cash equivalents. The importance of a cash flow statement is enormous. A company can run out of cash while it remains profitable. For companies that carry out a significant amount of non-cash transactions, revenue that is owed to them but are yet to be received in cash, having a cash flow statement is imperative. Some of the intentions of preparing a cash flow statement include: to provide information on a firm’s liquidity and solvency and its ability to change cash flows in future circumstances, to provide additional information for evaluating changes in assets, liabilities and equity, to improve the comparability of different firms’ operating performance by eliminating the effects of different accounting methods, indicate the amount, timing and probability of future cash flows etc. Without a cash flow statement, it may be difficult to have an accurate picture of a company’s performance. The income statement will tell you how much interest is paid on loan and the balance sheet will show how much the business owes, but only the cash flow statement will reflect how much cash was consumed servicing that loan. The income statement will record sales and profits but it’s the cash flow statement that will alert managers if those sales aren’t generating enough cash to cover expenses and will aid decision making in the organization. Hence, the cash flow statement is indispensable.