CASH FLOW STATEMENT
Paradoxically a situation arises when profits are reported but the negative cash flows are experienced by the business entities. Hence, it is of the essence that the changes in cash position be depicted; to know the cash concepts that the statement of cash flows is based upon; to get the information about the cash receipts and the cash payments during a period. Also, it is necessary to assess the ability of a business entity to generate cash, so that it can be used as and when it is needed. Moreover, it is required to assess the liquidity and solvency position of a business. Thus, the preparation of cash flow statement is very much useful to management. It is one of the three main financial statements (Income Statement, Balance Sheet and cash flow statement).
The cash flow statement is an important tool, as it explains the changes in cash and gives the information related to the business operating, investing and financing activities in a way to bring advantage to short term analysis and cash planning of the business.
The basic objective of cash flow statement is to provide the information to the management about the cash receipts and the cash payments of an organization being used for efficient cash management. Since one of the important functions of a financial manager is cash management and to ensure if adequate cash is available to meet the liabilities, it is owing to the cash flow statement that the related information is derived. In this way, cash flow statement is useful to plan financial operations in an efficient manner.
Cash flows are inflows and outflows of cash and cash equivalents. The cash activities are classified into three main categories of cash inflows and cash outflows. The tree categories are:-
- Operating activities
- Investing Activities
- Financing Activities
Operating Activities:- They are revenue generating activities of the business entity. They include cash effects of transactions by which Net profit or loss is determined.
Investing Activities:- Investing activities are those that involve the acquisition and selling fixed assets.(Land, building and equipments) not held for resale.
Financing Activities:- These activities are the activities by which the size and the composition of owners’ capital is changed.
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