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Cash Flow Statement

A Cash Flow Statement is a key financial statement that shows the movement of cash and cash equivalents in a business during a specific period. It records how cash is generated and used in operating, investing, and financing activities. Unlike the income statement, which is based on accrual accounting, the cash flow statement focuses only on actual cash transactions, making it a reliable tool for assessing liquidity and short-term financial health. It helps stakeholders understand whether a company has enough cash to meet obligations, reinvest in the business, and distribute dividends. By analyzing the cash flow statement, businesses can identify cash shortages or surpluses and make informed financial decisions.

Objectives of Cash Flow Statement

The main objective of a cash flow statement is to present a clear picture of cash inflows and outflows during a specific period, showing how cash is generated and utilized in business operations. It helps in assessing the liquidity position of the company and its ability to meet short-term obligations on time. The statement also evaluates the capacity of the business to generate cash from operating activities while highlighting the impact of investing and financing decisions on cash position. By providing such information, it supports management in planning future cash requirements, utilizing funds effectively, and making sound financial decisions. Additionally, it allows comparison of cash flow performance across different periods and with other organizations, and serves as a control tool by identifying deviations between projected and actual cash flows.

Benefits of Cash Flow Statement

*Reveals cash available for short-term needs.	*Helps compare performance across periods.
*Assists in forecasting future cash needs.	*Identifies gaps between expected and actual cash flows
*Indicates ability to generate cash from core business.	*Builds trust for investors and lenders.
* Useful for investment and financing choices.	*Easier to analyze than other complex financial statements.
* Reflects solvency and fund management.	*Clearly tracks actual inflow and outflow of cash.

Types of Cash Flow Statement

Cash budgets can be prepared in different ways depending on the purpose and period of planning.

OPERATING ACTIVITIES

This type of cash flow shows the cash generated or used in the normal operations of a business. It includes transactions such as cash received from sales, payments made to suppliers, salaries paid to employees, and taxes paid to the government.

INVESTING ACTIVITIES

This section records the cash used for or generated from investments in long-term assets. It covers activities such as the purchase or sale of property, plant, and equipment, or investments in shares and securities. Cash flow from investing activities helps in understanding how the company is growing, expanding, or restructuring its asset base for future profitability.

FINANCING ACTIVITIES

Financing activities reflect the cash flow between the business and its owners or creditors. It includes issuing shares, borrowing or repaying loans, and paying dividends to shareholders. This type of cash flow explains how a company raises capital, manages its borrowings, and distributes profits, showing the financial strategies used to support operations and growth.