Accounting Article
Purposes and Uses of The Statement of Cash Flows
Statement of cash flow includes the total money gained and expenses incurred in business, especially when it involves liquidity. It is the total sum of cash and non-cash transaction in a company; it is the total of all the financial transaction of a company. The statement of cash flow also includes non-cash transactions like interest and taxes paid. The primary purpose of a cash flow statement is to:
(1.) Show information about a company’s income and how much they spend for a given period.
(2.) Show the sources, uses, the amount of inflow and outflow of a company. It shows the progress, growth and financial trend of a company.
(3.) Show the changes in cash of a company
(4.) Anticipation of future cash flows
(5.) Show it as a part of legal documents of a company for legal reasons
(6.) depicts non-cash financial transactions and investments
The three principal activities of cash flow are: operating cash flow, investing cash flow and financial cash flow.
Operating cash flow: It includes profit generating transactions of a company like salaries and money spent on purchasing equipment for the enterprise. It shows income and money dedicated to company’s operation. The operating cash flow determines the financial strength of the industry.
Investing cash flow: It depicts profit and losses due to investment. Either in the financial market or invest in equipment or people.it also includes money lent out of the company or loan collected. Investing cash flow shows the efficiency of utilization of capital in the business. It includes money made from buying or selling of fixed assets like properties, plant, and equipment.
Financial cash flow: it shows external transactions that help a company to raise funds for different projects. It reveals the financial strength of the enterprise. It indicates the circulation of capital between the creditors, owner of a company and a company, profits made from stock sales, notes and bonds, and money spent on dividends. Money borrowed and debts paid are included in this cash flow. Positive financial cash flow indicates that the income is greater than the expenses of the business while negative cash flow means that expenses are higher than income.
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References
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