The statement of cash flow is one of the four financial statements we were introduced to. Unlike the statement of financial position, also known as the balance sheet which provides insight into an organisation’s financial worth and the income statement which provides a breakdown of the organisation’s revenue viz-a-viz its expenses, the statement of cash flow provides information on all the cash flows, inflows and outflows, which the organisation receives or pays for, respectively from its business activities within a particular period.
The statement of cash flow is divided into three sections, that is the cash flows from an organisation’s operating activities; cash flows from its investing activities; and cash flow from its financing activities. The cash flows from operating activities provide information on the cash equivalent of the organisation’s net income. The section reports only operational activities like procurement, payment of salaries etc. while the cash flows from investing activities, which is the second section of the statement of cash flow, reports on the result of the organisation’s gains or losses from its investments like its capital expenditures. The third section of the statement of cash flow, the cash flows from financing activities, gives the user an insight into the organisation’s financing activities. It compares cash flows from the organisation, its stockholders and its creditors. Users analyse this section to determine dividend pay outs or share buybacks.
It is believed that, of the four financial statements, the income statement and the statement of cash flow are the most valuable to the user of an organisation’s report and of the two, it is further said that the statement of cash flow is the most important. This is because it informs the user about the proceeds or cash made by the organisation through its operating, investing and financing activities. It gives the user, access to the “soul” of the organisation and helps determine the value of the organisation’s net worth.
Furthermore, the statement of cash flow is believed to be the most important because it provides more insight into the viability of an organisation’s ability to generate sufficient cash for its growth. Operating cash flow is a measure of the cash generated from the organisation’s daily business activities and its impact on its net income. It is not enough to generate income; it is better to generate revenue and have a cash equivalent that will facilitate the business activities of an organisation and its growth.
Globally, most organisations use the accrual basis of accounting, where transactions are recorded when revenue is earned or when an expense is incurred. The result of this is that their income statement usually ends up being different from their cash position. This is because the organisation may earn revenue, which is reflected in its income statement and even pay taxes on the revenue earned, but may not receive the cash for the reported revenue until a later date.
Although most organisations use the accrual basis of accounting, investors would rather have organisations in which they invested to generate the bulk of their revenue or cash flow from their operations.
