Cash flow is defined as the movement of finances into or out of a business or project. It is usually measured during a strictly specified accounting period. The given measurements can be used to calculate additional parameters shedding light on a firm’s income, stockholders’ equity, and other aspects of a company’s operation. The statement of cash flow is the most important financial document classifying investments and explaining the changes in the cash balance of an organization during a mentioned period (Miao, Teoh, & Zhu, 2016).
The major purpose of the document is to give users information about cash payments and cash receipts and to show the effect of financial activities on cash equivalents. Its data are considered when decisions about a company’s performance and increasing of revenues are being made.
The Purpose, Format, and Relevance of the Cash Flow Statement
The cash flow statement data are always dependent on activities listed in the income statement and balance sheet. Since it displays the outcomes of business operations contained in both documents, its purpose then is to illustrate what effect these activities have on a bank account. Users receive exhaustive information as to where the finances come from and what they are being allocated to owing to a specific format identifying what aspects the cash flow statement needs to cover.
This format comprises the following: receipts received from customers, payments paid to suppliers, salaries paid to employees, bank interest, and U.S. Treasury bills/tax payments (Chang, Dasgupta, Wong, & Yao, 2014). Although the model is difficult and time-consuming to create, it allows managers and investors to operate with precise data and, thus, make more balanced decisions. In its turn, it leads to the more efficient use of available resources and an overall increase in annual revenues.
What makes the statement of cash flow an important component of a firm’s market activity is that it assists decision-makers in predicting events and planning appropriate actions. One, for example, can anticipate future deficits and take the response measures beforehand to diminish its impact. Also, if a company has accumulated a positive balance in any period, a part of funds can be invested in the capital market to serve as the source of additional income (Lewellen & Lewellen, 2016).
The cash flow statement identifies what enters and exits a business and which effect it has on cash equivalents. Knowing how an organization manages its finances allows potential investors to evaluate whether a company can pay back the principal portion and interest or its readings do not prove to be promising. With regards to this fact, one can conclude that the statement of cash flow is an integral constituent of business, for it answers the question of whether an organization can earn money or not.
The cash flow statement is an important document, which carries meaning for the key business stakeholders and unveils data helping managers to make the right choices and immediately react to changes in financial flow. The major purpose of this document is to provide users with information regarding payments and show the influence of a company’s activities on cash equivalents and investors’ decisions. The format of the statement allows decision-makers to consider all necessary payments, including interests and taxes, and to act according to the occurring situation. Thus, one can easily monitor what enters or exits a company’s budget and issue corresponding instructions.
Chang, X., Dasgupta, S., Wong, G., & Yao, J. (2014). Cash-flow sensitivities and the allocation of internal cash flow. The Review of Financial Studies, 27(12), 3628-3657.
Lewellen, J., & Lewellen, K. (2016). Investment and cash flow: New evidence. Journal of Financial and Quantitative Analysis, 51(4), 1135-1164.
Miao, B., Teoh, S. H., & Zhu, Z. (2016). Limited attention, statement of cash flow disclosure, and the valuation of accruals. Review of Accounting Studies, 21(2), 473-515.