Finance Write for Us
Finance Write For Us – If you plan to study Accounting, one of the essential topics for an excellent financial analysis is financial statements. From these, the statement of cash flows derived is vital for every company since it reflects its liquidity and sustainability.
If you want to learn more about this concept and delve into financial statements, in the following Certus article, we will tell you what the statement of cash flows is, what it is for, and its structure.
What is the statement of cash flows?
To give a concise answer, the statement of cash flows is an integral part of the financial statements that summarize and show a company’s cash transactions over a given period.
What is the cash flow statement used for?
The statement of cash flows reflects the liquidity of the company and, therefore, helps to determine its viability in the short term. That includes the company’s ability to pay bills, payroll, and other immediate expenses.
On the other hand, the statement of cash flows is also beneficial for investors, credit institutions, or creditors who need to know the financial stability of the company and its ability to pay its debts.
This is a cash and cash equivalents-only state. Any transaction that does not directly affect payments or cash receipts is excluded.
On the other hand, it is essential to note that information on activities not related to cash can also be included as footnotes. Under International Financial Reporting Standards (IFRS), such information may also be used in preparing financial statements.
It is important to note that the cash flow statement is different from the income statement (also known as the profit and loss statement) and the balance sheet (also called the statement of financial position) because it does not include the amount of future incoming and outgoing cash that has been recorded on credit.
Therefore, cash does not equal net income, which on the income statement and balance sheet includes cash sales and credit sales.
Companies must pay more attention to cash flow statements to manage them in the best possible way. Professionals who work in a company’s financial analysis and planning spend considerable time evaluating the flow of their funds to identify possible problems.
It may interest you: Everything you need to know about financial statements.
Structure of the cash flow statement
This is a statement that categorizes all your cash transactions into three types. These are the components of cash flow:
- Cash from operating activities
- Cash from investing activities
- Cash from financing activities
1. Cash from operating activities
Cash from operating activities presents the incoming or outgoing movements of cash over time due to the production or sale of the company’s goods or services.
The operating activities of the statement of cash flows include any source that uses the cash from the company’s activities. In other words, this reflects how much cash is generated from the company’s products or services.
These operations may include sales of goods and services, interest payments, payments made to suppliers of goods and services used in production, salary payments to collaborators, rent payments, accounts receivable, the purchase of raw materials, and any other type. of operating expenses.
2. Cash from investing activities
This includes any source or use of cash from the company’s investing activities. These activities represent how disbursements are made that are expected to produce income or cash flows later.
This category includes the purchase or sale of an asset, loans requested or received, changes in equipment, assets, or investments related to cash from investment activities.
3. Cash from financing activities
These are activities that include sources of cash from investors or banks and the use of cash paid to shareholders. Some examples are proceeds from the issuance of equity instruments, payments for repurchasing or redeeming shares, proceeds from loans, bonds, and other funds received as a loan.
Now you know what cash flow is and what it is for. Does this brief introduction arouse your curiosity? The Accounting degree could help you delve into this and other exciting topics.
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