This is a part of the financial statement required by law or the accounting standard.
A cash flows statement provides information beyond that available from other financial statement such as the Income Statement and the Balance Sheet. It is an important information because cash flow is essential to the continued operation of a business. The main purpose of the statement, according to the Financial Accounting Standard Board (FASB) is to provide:
- Information about the changes of an entity cash or cash equivalents in the accounting period.
- Information about a company borrowing and debts repayment activities.
- The company sale and repurchase of its ownership securities.
- Other factors affecting the company's liquidity and solvency.
The normal format of The Cash Flow Statement is:
Statement of Cash Flows for the period 1/1/2005 to 31/12/2005.
|
Debit +/- |
Credit +/- |
|
|---|---|---|
|
Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees |
Balance c/d |
|
|
Cash flow from investing activities |
||
|
Cash flow from financing activities |
||
|
Net increase/decrease/Change in the cash and cash equivalents |
||
|
Cash and cash equivalents at the beginning of period |
||
|
Cash and cash equivalents at the end of period |
Each of the above headings will have further details, such as Cash flow from operations with increase in account receivables, accounts payables, cash receipts from customers, payment for goods sold and operating expenses. The investing cash flow includes capital expenditures for long-term assets, sales of assets and investing in joint ventures etc. Financing cash flow includes debts financing, dispensing ownership funds and borrowings.
When activities that do not involve cash they are not normally disclosed on the statement, BUT the Standard requires such transactions to be disclosed by way of footnotes or on a separate schedule.
The importance of the Cash Flow Statement for investment decision making includes:
- Regular operations is sustainable or not.
- Sufficient cash generated to pay debts or not.
- The likelihood that the company needs further financing.
- Can unexpected obligations or opportunities be taken up by the company without difficulty.
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