The Statement of Cash Flows
A cash flow statement provides information beyond that available from other financial statements, such as the Income Statement and the Balance Sheet, through providing a reconciliation between the beginning and ending balances of cash and cash equivalents of a firm over a fiscal or accounting period.The main purpose of the statement, according to the Financial Accounting Standard Board (FASB) is to provide information about the changes of an entity's cash or cash equivalents in the accounting period .
Statement of Cash Flows
Balancing the Statement of Cash Flows by hand.
Structure of the Statement of Cash Flows
The statement shows historical changes in cash and cash equivalents rather than working capital. It provides information about a company's borrowing and debt repayment activities, the company's sale and repurchase of its ownership securities, and other factors affecting the company's liquidity and solvency. It does not predict future cash flows.
In addition, the statement is used to assess the following: the company's ability to meet its obligations to service loans, pay dividends, etc.; the reasons for differences between reported and related cash flows; and the effect on its finances of major transactions in the year. The statement of cash flows lists all cash inflows and outflows during a reporting period from operating, investing and financing activities.
It has three primary categories from which cash flows derive:
- Operating activities - principal revenue-producing activities of the company and other activities that are not investing or financing activities. Cash inflows include cash receipts from sales of goods or services; interest received from making loans; dividends received from investments in equity securities; and cash received from the sale of securities that were held for trading purposes, issued by other businesses. Securities that are held for trade are generally investments that a business holds for a very short period of time with the intent to sell for a quick gain.
- Investing activities - the acquisition and disposal of long term assets and other investments not included in cash equivalents. Transactions include the sale and acquisition of property, plant, and equipment; the collection and granting of long-term loans to others; and the trading of available-for-sale and held-to-maturity securities of other businesses. Securities that are held-to-maturity are those that a business plans to hold onto until the security's term is up. An available-for-sale security is an investment that does not qualify as "held-to-maturity" or "trading".
- Financing activities - activities that result in changes in the size and composition of the equity capital and borrowings of the enterprise. Transactions include cash received by the company issuing its own capital stock and bonds, as well as any other short- or long-term borrowing it may do.