Cash Flow Statement: Definition, Strategies & Examples (2024)

FAQs

Cash Flow Statement: Definition, Strategies & Examples? ›

A cash flow statement summarizes the amount of cash and cash equivalents entering and leaving a company. The CFS highlights a company's cash management, including how well it generates cash. This financial statement complements the balance sheet and the income statement.

A cash flow statement tells you how much cash is entering and leaving your business in a given period. Along with balance sheets and income statements, it's one of the three most important financial statements for managing your small business accounting and making sure you have enough cash to keep operating.

The cash flow statement is broken down into three categories: Operating activities, investment activities, and financing activities.

Direct method – Operating cash flows are presented as a list of ingoing and outgoing cash flows. Essentially, the direct method subtracts the money you spend from the money you receive. Indirect method – The indirect method presents operating cash flows as a reconciliation from profit to cash flow.

If the inflow is higher than the outflow, the company is having positive cash flow. A negative cash flow situation arises when cash outflow exceeds the inflow. Business investments with a good long term cash flow prospects often generate poor cash flow in the short term (or the early years).

One can conduct a basic cash flow analysis by examining the cash flow statement, determining whether there is net negative or positive cash flow, pinpointing how the outflows compare to inflows, and draw conclusions from that.

Many accountants prefer the indirect method because it is simple to prepare the cash flow statement using information from the other two common financial statements, the income statement and balance sheet.

Why do we prepare a cash flow statement? ›

The importance of the cash flow statement is that it measures the cash inflows or cash outflows during the given period of time. This knowledge informs the company's short- and long-term planning. It also helps in analyzing the optimum level of cash and working capital needed in the company.

Positive cash flow indicates that a company's liquid assets are increasing, enabling it to cover obligations, reinvest in its business, return money to shareholders, pay expenses, and provide a buffer against future financial challenges.

A cash flow statement is a financial statement that shows how cash entered and exited a company during an accounting period. Cash coming in and out of a business is referred to as cash flows, and accountants use these statements to record, track, and report these transactions.

A basic example of cash flow could be a business that generates income from customer sales and pays employees their salaries and production expenses in order to produce the products being sold. The customer sales, or revenue, would be the cash inflow, while the production costs and salaries would be the cash outflow.

A cash flow statement is an important tool used to manage finances by tracking the cash flow for an organization. This statement is one of the three key reports (with the income statement and the balance sheet) that help in determining a company's performance.

A statement of cash flows is a financial statement prepared at the end of the accounting period, showing cash inflows from ongoing operations and external investment sources and cash outflows paid for business investments and activities.