Purpose of Cash Flow Statements.The cash flow statement has a very important influence on your business. As a business person you must understand cash flow, not just an accountant. So, studying cash flow is important for all business people.
With the cash flow statement, you will know the condition of your company in a profit or loss condition. Usually this cash flow statement contains the company’s cash income and expenditure within a certain period. Before you know how to make a cash flow statement, you need to understand what things are in cash flow.
What is Cash Flow?
Cash flow is a breakdown that shows the amount of income and expenses in a given period. Cash flow in business and family finances is slightly different. If the family finances the cash flow in question is cash basis. Meanwhile, in business finance there is a cash basis and accural basis. Cash flow statements usually include the amount of cash received. Examples such as cash investment and cash income, and the amount of cash spent by the company.
Purpose of Cash Flow Statements
The purpose of the cash flow statement itself is to present information about cash receipts and disbursements in an accounting period. Besides being beneficial to the company, cash flow statements also have benefits for investors, creditors, and others. With the cash flow statement, you can assess the following things.
a. The Entity’s Ability to Get Cash Flow
The cash flow statement is considered better than the actual data. With a cash flow statement, you can make predictions about the ability of a company’s entity to generate cash flow in the future.
b. Investment Transactions & Cash Funding
The amount of assets and liabilities may change due to certain factors. There is an examination of investment and funding transactions, then you can find out the cause of the changes in the two accounts.
c. Entity’s ability to pay dividends and liabilities
With a cash flow statement, the company can ascertain the amount of cash to pay a number of obligations. For example, employee salaries, payment of debts, and paying dividends (profit sharing to shareholders). In addition, with the cash flow statement, investors can see an overview of cash flow in your company’s business activities.
d. Remarks on the Difference between Net Profit & Net Cash Figures
Information on net income is needed by parties who use financial statements. With the net profit data obtained by the company, it can be seen the extent of its successes and failures.
3 Components of a Cash Flow Statement
There are 3 components to the cash flow statement, namely:
a. Cash Flow from Operating Activities
Cash flows from operating activities are cash flows from transactions originating from the activity itself. Usually this transaction takes the form of company income or expenses. Examples are transactions that include receiving money from consumers, debt payments, employee salaries, tax payments, and so forth.
b. Cash Flow from Investment Activities
Cash flows from investing activities are cash flows in the form of income or expenses. Generally, this cash flow that affects investment in non-current assets is cash flow from investment activities. These investment activities are those related to the sale or purchase of company assets. Examples such as, transactions that involve the sale and purchase of fixed assets such as equipment and buildings.
c. Cash Flow from Funding Activities
Usually the cash flow from this funding activity comes from transactions that affect the company’s debt and equity. This is generally, transactions that include the issuance or termination of equity and debt securities. Examples are bond sales, dividend payments, stock issuances, and repayment of credit from banks.