The Statement of Cash Flows (also known as the Cash Flow Statement) is one of the financial statements that provides a summary of how a company generates and uses cash during a specific accounting period, typically a quarter or a year. It is an essential financial document used by investors, creditors, and analysts to assess a company’s financial health and its ability to generate cash for various activities.
The Statement of Cash Flows is divided into three main sections:
1. Operating Activities: This section reports the cash flows resulting from the core operating activities of the company. It typically includes cash received from customers, cash paid to suppliers, employees, and other operational expenses. It provides insight into the company’s ability to generate cash from its primary business operations.
2. Investing Activities: This section details cash flows related to investments in assets that are not considered part of the company’s core operations. Common examples include purchases or sales of property, plant, and equipment, investments in other companies, and the acquisition or sale of marketable securities. Investing activities can either use or provide cash, depending on the nature of the transaction.
3. Financing Activities: This section outlines cash flows related to the company’s financing activities, such as obtaining loans, repaying debt, issuing or repurchasing shares, and paying dividends to shareholders. It provides insights into how a company raises and repays capital.
The Statement of Cash Flows also includes a reconciliation of the beginning and ending cash and cash equivalents balances to show how cash on hand changed during the reporting period. This reconciliation accounts for all cash inflows and outflows from the three main sections.
The purpose of the Statement of Cash Flows is to help stakeholders assess a company’s liquidity, solvency, and its ability to fund future growth. By analyzing the statement, investors can determine if a company is generating enough cash from its core operations to cover its obligations and if it has the financial capacity to invest in new projects or pay dividends to shareholders.
In summary, the Statement of Cash Flows is a crucial financial statement that provides a snapshot of a company’s cash flow activities over a specific period. It complements the Income Statement and Balance Sheet in providing a comprehensive view of a company’s financial performance and financial position.