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Cash Flow Statement

A cash flow statement, also known as the statement of cash flow is a financial report depicting amount of incoming and outgoing money during a particular time period. The statement does not include non-cash items like depreciation, thus making it useful for determining the short-term ability of a company to meet its liabilities.

It summarizes the company's cash receipts and cash disbursements over a period of time. It also lists cash to and cash from operating, investing, and financing activities, and also the net increase or decrease in cash for a particular period.

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A cash flow statement collects, organizes and reports the cash generated and used in the following categories:
  • Operating activities: Converts the items reported on the income statement from the accrual basis of accounting to cash.

  • Investing activities: Reports the purchase & sale of long-term investments, property, plant and equipment.

  • Financing activities: Reports the issuance and repurchase of the company's own bonds, stock and the payment of dividends.

  • Supplemental information: Reports the exchange of significant items that did not involve cash and reports the amount of income taxes paid and interest paid
Most companies hire professionals or take the help of accountants for getting the cash flow statements made. This helps them have an accurate analysis of the firm's ability to meet its current liabilities.

Advantages of a Cash Flow Statement
  • Helps the company to know whether it will be able to cover payroll and other immediate expenses
  • Helps the lenders to know the company's ability to repay
  • Helps the investors judge whether the company is financially sound
  • Helps the newly formed companies to know their inflow and outflow of cash and thus prevent cash shortage
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