Cash Flow Statement

Introduction to Cash Flow Statement

mini-lectures: Cash Flow Statement The cash flow statement was previously known as the flow of Cash statement.The cash flow statement reflects a firm's liquidity.

The balance sheet is a snapshot of a firm's financial resources and obligations at a single point in time, and the income statement summarizes a firm's financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues. The cash flow statement includes only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments. These non-cash transactions include depreciation or write-offs on bad debts or credit losses to name a few. The cash flow statement is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Non-cash activities are usually reported in footnotes.

The cash flow statement is intended to

  1. provide information on a firm's liquidity and solvency and its ability to change cash flows in future circumstances
  2. provide additional information for evaluating changes in assets, liabilities and equity
  3. improve the comparability of different firms' operating performance by eliminating the effects of different accounting methods
  4. indicate the amount, timing and probability of future cash flows

The cash flow statement has been adopted as a standard financial statement because it eliminates allocations, which might be derived from different accounting methods, such as various timeframes for depreciating fixed assets.

The cash flow statement organizes and reports the cash generated and used in the following categories:

1. Operating activities converts the items reported on the income statement from the accrual basis of accounting to cash.
2. Investing activities reports the purchase and sale of long-term investments and property, plant and equipment.
3. Financing activities reports the issuance and repurchase of the company's own bonds and stock and the payment of dividends.
4. Supplemental information reports the exchange of significant items that did not involve cash and reports the amount of income taxes paid and interest paid.

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