Cash is considered to be king and when you talk about business or companies than it assumes even more importance and that is the reason why companies place emphasis on the statement of cash flows. Statement of cash flows refers to that financial statement which shows the cash position of the business from one accounting period to another accounting period due to various operating, financing and operating activities are done by the company during the year. In order to understand more about this concept, one should look at the features of the statement of cash flows –
Features of Statement of Cash Flows
Cash Flows from Three Activities
Statement of cash flows segregates cash flows from three activities that are cash flow from operating activities which involve cash inflow from sales of goods or cash outflow for various operating expenses like salary, rent of preemies and so on. The second category comprises of cash flows from investing activities which involve cash inflow by selling fixed assets like land, building, or make investments or cash outflow when the company purchase fixed assets like land, building or make investments. The last category comprises cash flows from financing activities which involve cash inflow when a company receives interest and dividend income on investments done by the company or cash outflow when the company repurchases shares or pays the principal amount of debt and so on.
Cash Transactions are Considered
In the statement of cash flows, only those entries which involve cash transactions are taken into account and all other entries are excluded. Hence for example if the company has made cash sales of $2000 and credit sales of $200000 than only cash sales of $2000 will be shown in cash flow statement even though credit sales is 100 times of cash sales.
Shows Cash Position Only
Cash flow statement will show only the cash position of the business that is whether the company has surplus cash or negative cash flow and it does not tell whether the company is making profit or loss. In simple words, it may be possible that company has positive cash flow but still making a loss and vice versa and that is the reason why looking at cash flow statement in isolation can be a big mistake.
Needs other Financial Statements
Cash flow statement in isolation is of no use as it depicts only cash position or liquidity position of the company and that is the reason why companies use other financial statements like profit and loss statement, balance sheet in conjunction with cash flow statement so as to get correct picture about the company’s financial position.
Cash Planning
Statement of cash flows is very useful when it comes to planning about cash because if there is surplus of cash than company use that cash for productive activities of the business and earn profits and if there is deficiency of cash than company can plan accordingly so that company does not has to face humiliation due to shortage of cash and liquidity. In simple words when it comes to making plans about the future liquidity of the business than cash flow statement assumes more importance and other financial statements take back seat.
As one can see from the above cash flow statement has many unique characteristics and that is the reason why companies lay emphasis on preparing cash flow statement in addition to financial statements like balance sheet and profit and loss account.