Statement of cash flows

Definition

The statement of cash flows is a financial statement that provides information about a company's cash inflows and outflows during a specific period of time. It is one of the three primary financial statements, along with the balance sheet and income statement, that are used to analyze a company's financial health and performance.

5 Must Know Facts For Your Next Test

1. The statement of cash flows is divided into three main sections: operating activities, investing activities, and financing activities.
2. The operating activities section shows the cash generated or used by a company's core business operations, such as selling products or services.
3. The investing activities section shows the cash used to acquire or sell long-term assets, such as property, plant, and equipment.
4. The financing activities section shows the cash received from or used to repay external financing, such as issuing or repaying debt or equity.
5. The statement of cash flows is used to assess a company's liquidity, solvency, and financial flexibility by analyzing the sources and uses of cash.

Review Questions

• Explain the purpose of the statement of cash flows and how it differs from the income statement and balance sheet.
  • The statement of cash flows provides information about a company's cash inflows and outflows during a specific period, whereas the income statement shows a company's profitability and the balance sheet shows a company's financial position at a specific point in time. The statement of cash flows is important for understanding a company's liquidity and ability to generate cash to fund operations, invest in the business, and meet financial obligations. It complements the information provided in the income statement and balance sheet by showing how changes in the balance sheet and income statement accounts affect the company's cash position.
• Describe the three main sections of the statement of cash flows and the types of activities included in each section.
  • The statement of cash flows is divided into three main sections: operating activities, investing activities, and financing activities. The operating activities section shows the cash generated or used by a company's core business operations, such as selling products or services and paying for expenses. The investing activities section shows the cash used to acquire or sell long-term assets, such as property, plant, and equipment. The financing activities section shows the cash received from or used to repay external financing, such as issuing or repaying debt or equity. Understanding the cash flows in each of these sections provides insights into a company's liquidity, financial flexibility, and ability to generate cash to fund its operations and investments.
• Analyze how the statement of cash flows can be used to assess a company's financial health and performance, particularly in the context of 14.3 Basic Accounting Procedures and 14.6 The Statement of Cash Flows.
  • The statement of cash flows is a crucial tool for assessing a company's financial health and performance, especially when considered in the context of the basic accounting procedures (14.3) and the statement of cash flows (14.6). By analyzing the cash flows from operating, investing, and financing activities, you can gain insights into a company's liquidity, solvency, and financial flexibility. For example, positive cash flows from operating activities indicate the company is generating cash from its core business operations, which is a sign of financial health. Negative cash flows from investing activities may suggest the company is investing in long-term assets to support future growth. Positive cash flows from financing activities could indicate the company is raising capital to fund its operations and investments. Overall, the statement of cash flows provides a comprehensive view of how a company is managing its cash resources, which is essential for understanding its financial position and performance within the broader context of basic accounting procedures and the statement of cash flows.

Related terms

Cash flow: The net amount of cash and cash-equivalents moving into and out of a business, especially as affecting liquidity.

Operating activities: The day-to-day business activities that generate revenue and expenses, such as selling products, purchasing inventory, and paying employees.

Financing activities: Activities that involve the raising or repayment of capital, such as issuing or repurchasing stock, taking out or repaying loans, and paying dividends.