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. It shows how changes in the balance sheet and income statement accounts affect the company's cash and cash equivalents, and categorizes the sources and uses of cash into operating, investing, and financing activities.

5 Must Know Facts For Your Next Test

1. The statement of cash flows is one of the three primary financial statements, along with the balance sheet and income statement.
2. The statement of cash flows is used to evaluate a company's liquidity, solvency, and financial flexibility.
3. The statement of cash flows is divided into three main sections: operating activities, investing activities, and financing activities.
4. The indirect method is the most common way to prepare the statement of cash flows, which starts with net income and makes adjustments to convert it to a cash basis.
5. The statement of cash flows helps users understand how a company's operations, investments, and financing activities affect its cash position.

Review Questions

• Explain the purpose and importance of the statement of cash flows in financial reporting.
  • The statement of cash flows is a crucial financial statement that provides information about a company's cash inflows and outflows during a specific period. It helps users understand how a company's operations, investments, and financing activities affect its cash position, which is essential for evaluating the company's liquidity, solvency, and financial flexibility. The statement of cash flows is particularly important because it shows the actual cash generated and used by the company, rather than just the accrual-based net income reported on the income statement.
• Describe the three main sections of the statement of cash flows and the types of activities included in each.
  • The statement of cash flows is divided into three main sections: operating activities, investing activities, and financing activities. The operating activities section includes cash flows related to the company's normal business operations, such as cash received from customers and cash paid to suppliers and employees. The investing activities section includes cash flows related to the acquisition and disposal of long-term assets, such as investments, property, plant, and equipment. The financing activities section includes cash flows related to the company's financing, such as the issuance and repayment of debt and equity, as well as the payment of dividends.
• Explain how the statement of cash flows can be used to assess a company's financial health and decision-making.
  • The statement of cash flows provides valuable information for assessing a company's financial health and decision-making. By analyzing the cash flows from operating, investing, and financing activities, users can evaluate the company's liquidity and solvency, as well as its ability to generate cash, fund its operations, and make investments for future growth. A positive cash flow from operating activities, for example, indicates the company's ability to generate cash from its core business operations, which is essential for long-term sustainability. Analyzing the cash flows can also help users identify trends and patterns in the company's cash management, which can inform investment decisions and strategic planning.

Related terms

Cash Flows from Operating Activities: The cash flows generated from a company's normal business operations, such as cash received from customers and cash paid to suppliers and employees.

Cash Flows from Investing Activities: The cash flows related to the acquisition and disposal of long-term assets, such as investments, property, plant, and equipment.

Cash Flows from Financing Activities: The cash flows related to the company's financing, such as the issuance and repayment of debt and equity, as well as the payment of dividends.