Understanding the worth of the Cash Flow Statement

Cash flow statement is one of the most overlooked financial statements of all.  From the name, it’s clear that this statement describes inflow and outflow of cash to and from the organization. This statement just records the cash sales.  Cash flow has three sections, the first one is operating, the second one is investing and the third one is financing.  It can be prepared either through direct method or indirect method.  All the cash payments made and cash receipts occurred during a specific period will be shown by this statement.

Sections of the cash low statement:

The first section i.e.the operating section of the statement shows information about the amount of cash generated through sales as well as production on the basis of the income statement.  The second section i.e.the investing section shows how cash is being used or invested in the business.  Last but not the least is the financing section which shows information about the debts taken and the debts that you are paying.  Information from the balance sheet is used in these two sections.

Hence, cash flow statementintegrates the income statement as well as the balance sheet of a company.  This statement will tell you whether the cash of the company is increased or decreased during a specific period. The information provided by the cash flow statement can help the management of the company to make decisions regarding the operations, investments and financial activities of the business.

Investors find this statement much useful as it contains all those transactions too which are not clearly mentioned in the income statement or the balance sheet of the company.  When the company’s cash position will be determined, it will be easy to tell whether the firm is liquid or not.  If the firm is liquid then the investors will be ready to invest their money or give loan to the company.  They will be satisfied that the company will pay off the debts soon.

The successful investors always properly examine the cash flow statement of the company before deciding to invest money in a business.  Like all other financial statements, the cash flow statements are also important. The company preparing this statement also becomes conscious and it starts devising strategies to make sure the operations of the business don’t influence the financial conditions of the business. Otherwise, they will not be able to attract good investors at all.

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Understanding the worth of the Cash Flow Statement