Let us see, as to, what is cash flow statement? How does it helps in analysing cash and cash equivalents as well. Also how it helps in depicting the opening and closing cash and cash equivalents balance.
What is Cash Flow Statement?
Cash flow statement is one of the financial statements prepared to show the changes in cash and cash equivalents at the end of the year. It shows the cash inflows and cash outflows from operating activities, investing activities, financing activities at the year-end. It helps in cash flow analysis and management of cash and cash equivalents effectively
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Meaning of Cash and Cash Equivalents:
Cash and cash equivalents includes cash in hand, short term highly liquid investments which are easily convertible into known amounts of cash which are subject to insignificant risk or change in value, deposits with bank or financial institution which are repayable on demand.
Cash and cash equivalents are short term investments or current assets which are easily convertible into cash. Cash Flow Statement deals with only cash and cash equivalents. Non cash items are not included in Cash Flow Statement. This statement analyzes the change in cash and cash equivalents at the year end and discloses the opening and closing balance of cash and cash equivalents.
Meaning of Cash Flow:
Cash flow means inflows and outflows of cash and cash equivalents. Any transaction which does not involve cash flow is not shown in cash flow statement. Only transactions involving cash flow are recorded and shown in this statement.
There are three types of Cash flows such as
1. Net cash flow from Operating activities
2. Net cash flow from Investing activities
3. Net cash flow from Financing activities
Net cash flow from Operating activities:
Operating cash flows are the cash flows generated by operating activities of the business entity.
Operating cash flows are cash flows generated by activities which are not investing or financing activities. Operating activities are principal revenue producing activities of the business entity.
Examples of operating activities include purchase of goods on cash, sale of goods on cash, payments
suppliers of goods, receipts from customers of goods, payment of salary or wages.
Net cash flow from Investing activities:
Cash flow from Investing activities include cash generated from Investing activities. Investing activities
include acquisition of long term assets and long term investments,sale of long term assets and investments. Examples of Investing activities include receipts from sale of Fixed assets and long term investments, payments made to purchase fixed assets and long term investments.
Net cash flow from Financing activities:
Financing cash flows include cash flow from financing activities. Financing activities are those activities which result from change in size and composition of equity share capital and preference share capital and borrowings of the business entity. Examples of financing activities include issue of equity share capital, issue of debentures, redemption of debentures, payment of interest on debentures, payment of dividends on equity and preference share capital.
Cash flow statement needs to be prepared as per relevant accounting standards and financial reporting standards. The example or format of Cash flow statement of Alpha limited is as follows:
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Conclusion:
Now, we can explain, as to, What is Cash flow statement? Thus, Cash flow statement provides financial information to users of financial information regarding changes in cash and cash equivalents at the end of year. It helps in effective management of cash and cash equivalents and to predict the future requirement of cash and cash equivalents and to know the net increase or decrease in cash and cash equivalents at the year end.
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Nice blog! Thanks for sharing such a very informative article.
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Thank you for this information. I agree with you, As a business owner, it is important to know our Cash Flow every now and then. To track our expenses.
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ReplyDeleteA well-explained overview of cash and cash equivalents along with cash flow. Your explanation of the three types of cash flows is clear and informative, making it easier to understand how cash flow statement works. Appreciate the clarity and concise presentation of this important accounting concept. Great job!
The ending cash balance on the Cash Flow Statement should reconcile with the cash and cash equivalents reported on the Balance Sheet. If done correctly, the statement provides a clear picture of how a company generates and uses its cash resources and helps assess its ability to meet short-term and long-term financial obligations. Moolamore is an advanced accounting application that analyzes, manages, and projects real-time transaction data. Using our cash flow forecasting software and app, you can forecast and estimate your company's future financial position. Best Cash Flow Forecasting Software
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