Purpose of the Cash Flow Statement (2024)

FAQs

Purpose of the Cash Flow Statement? ›

A cash flow statement tracks the inflow and outflow of cash, providing insights into a company's financial health and operational efficiency. The CFS measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses.

The statement of cash flows provides information about a company's operating, financing, and investing activities. It reports cash receipts, cash payments, and net change in cash from operating, investing, and financing activities.

The primary objective of cash flow statement is to provide useful information about cash flows (inflows and outflows) of an enterprise during a particular period under various heads, i.e., operating activities, investing activities and financing activities.

They let you predict future cash flows.

You can use cash flow statements to create cash flow projections, so you can plan for how much liquidity your business will have in the future. That's important for making long-term business plans.

A cash flow budget estimates your business's cash flow over a specific time period. You can use the information to see if you have enough cash coming in to maintain regular operations over the given time frame. It can also give insight into how to allocate your budget effectively.

Answer and Explanation: The answer is Option D. A cash flow statement is prepared for a single financial year. This financial statement only records the current year's cash activities related to the operating, investing, and financing and covers the same time span of the income statement.

A cash flow statement is a financial statement that shows how cash entered and exited a company during an accounting period. Cash coming in and out of a business is referred to as cash flows, and accountants use these statements to record, track, and report these transactions.

Cash flow is the movement of money in and out of a company. Cash received signifies inflows, and cash spent is outflows. The cash flow statement is a financial statement that reports a company's sources and use of cash over time.

Typically considered the most important of the financial statements, an income statement shows how much money a company made and spent over a specific period of time.

How will you prepare a cash flow statement? ›

Direct Method

Under this approach of preparing a cash flow statement, all cash-related transactions within an accounting period are added and deducted accordingly to calculate the net cash flows. These transactions, in turn, are derived from the opening and closing balances of relevant accounts.

The Statement of Cash Flows Reports cash inflows and outflows in three broad categories: 1) Operating Activities, 2) Investing Activities, and 3) Financing activities. Together, these three cash flow categories explain the change in cash from the beginning balance to the ending balance on the balance sheet.

Cash flow is the difference between the amount of cash the company has at the beginning of an accounting period versus the amount of cash it has at the end of an accounting period. Cash flow represents, or is based upon, the operating activities of the business.

The income statement illustrates the profitability of a company under accrual accounting rules. The balance sheet shows a company's assets, liabilities, and shareholders' equity at a particular point in time. The cash flow statement shows cash movements from operating, investing, and financing activities.