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Statement of Cash Flows
A Statement of Cash Flows is a financial statement that shows how changes in various Balance Sheet accounts as well as income affect cash and cash equivalents. The Statement of Cash Flows shows the sources and uses of cash in a company. It tracks the cash that flows through the company during the fiscal period reported on. The Statement reports cash on hand at the beginning of the period, how the company acquired and spent cash in the period, and ultimately the amount of cash on hand at the end of the period.
The reporting period of the Statement of Cash Flows is always the same as the income statement. The FASB requires publicly traded companies to produce Statements of Cash Flow. The Statement shows changes in Income Statement and Balance Sheet accounts that affect cash and cash equivalents. This Statement breaks down the analysis of cash inflows and outflows into cash received or dispersed in operating activities, investing activities, and financing activities.
- Operating activities relate to a company's primary line of business - its primary revenue generating activities. The cash flows (either positive or negative) from operating activities are generally the cash effects of transactions included in the income statement.
- Investing activities involve the acquisition or the disposal of long term assets, and include lending money and collecting on those loans, and the buying and selling of securities. Here again, cash flows can either be positive or negative meaning that the company under review either increases or decreases the amount of cash and cash equivalents on hand.
- Financing activities include borrowing money from creditors as well as repaying the amounts borrowed. It also includes obtaining resources from owners and providing owners with both a return on their investment and at some point in the future a return of their investment.
One of the more important elements of financial statement analysis involves determining whether or not the customer has positive or negative cash flow. From the credit manager's point of view, the simplest way to interpret cash flows is to determine whether the customer is reporting a net increase in cash and cash equivalents or alternatively is reducing the amount of cash and cash equivalents on hand. Clearly, no company can sustain negative cash flows indefinitely.
© 2011. Michael C. Dennis. All Rights Reserved. Michael is the author of "Credit and Collection Handbook." Contact him with questions or comments at mcdennis13@yahoo.com