Understanding Cash Flow Statement: Definition, Importance, and Categories

Aggregates all cash inflows, which the company receives from its ongoing activities and investment sources, and all cash outflows.

Statement of cash flows

The process of aggregating all cash inflows and outflows of a company is known as cash flow statement preparation. Cash flow statement is a financial statement that reveals how cash moves in and out of a company during a given period of time. It shows how financial activities and operations are affecting the cash position of the company.

Cash inflows refer to any monetary or cash-related proceeds that a company receives through its regular business activities or investment sources. This could include sales revenue, interest income, dividends, loans, proceeds from the sale of assets, and others.

Similarly, cash outflows refer to the payment, expenditure or cash-related expenses a company incurs as a result of its ongoing operations or investment activities. This could include operating expenses, payment of loans and interest, capital expenditures, payments for acquisitions, and others.

To prepare a cash flow statement, the company has to gather financial data from various sources such as income statements, balance sheets, and other financial records. Once all data is collected, it is then organized in three categories: operating cash flow, investing cash flow, and financing cash flow.

The operating cash flow section reports all cash inflows and outflows that come from the company’s day-to-day operations. The investing cash flow section shows any cash inflows and outflows the company incurred from its investment activities, while the financing cash flow section records all cash inflows and outflows from financing activities such as acquiring loans or issuing stocks.

By aggregating all cash inflows and outflows, companies can determine their overall cash position and make more informed decisions regarding their financial activities. A positive cash flow is considered favorable, while a negative cash flow can be an indication of financial distress.

More Answers: