Statement of Cash flows
The Statement of Cash Flows is also called a cash flow statement, it is a financial statement showing changes in income and balance sheet accounts as this affects cash equivalents and cash and breaks the analysis down to investing, operating and financial activities. The cash flow statement captures and determines both the accompanying changes in the balance sheet and current operating results. It is vital in determining the short-term viability of a company most especially the ability to pay bills.
Reasons why companies prepare a statement of cash flows:
To know the Company Positions in terms of financial strength
To determine the durability of the Company
To know The assets and liabilities of the Company
Profitability reasons: The reason why company prepare the statement of cash flows is to determine and know its profit, the organization or company need to know how much it makes every year, either a company makes profit or loss
Company Positions: The Company can determine its liquidity position to determine its position
Durability of the company: Statement of cash flows helps to determine the long-term solvency of a company as this determines how long a company will last or will it fold up at a future date.
The Assets and Liabilities of the Company: The Statement of Cash flows can be used to know a company or organization assets such as land and building, equipment, freehold premises, plant and machinery and many more and also used to know the company or organizations outstanding debts
The statement of cash flows is separated in to three sections namely:
- Cash flows from operating activities
- Cash flows from investing activities
- Cash flows from financing activities
- Cash flows from operating activities: This section deals with how much cash the company generates from its main business as opposed to peripheral activities such as borrowing or investing. It deals with how company or business is producing cash that will ultimately benefit shareholders.
- Cash flows from investing activities: It shows the amount of cash companies or organizations spend or expended on investments. Investments is classified into monetary investments such as purchase or sales of money market funds or capital expenditures, that is money spent or expended on items or goods such as new equipment or anything else needed to keep the organization or company running smoothly.
- Cash flows from financing activities: This has to do with transactions with the company’s or organization debtors or owners. For example, cash proceeds from dividends paid to investors would be found in this section.