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Print this chapterOverview of Financial Statements
Read each section in this chapter, which explains the purpose of the balance sheet, income statement, and the cash flow statement. It also is a guide to where you will find financials on publicly traded companies. You should get as much practice working on these statements as you can, since they are the fundamental information on any organization. Make the connections between each financial statement. The more you understand the connectivity of these statements, the better understanding you will have of how the entire accounting system works, which is important if you want to understand the overall operations of any company.
The Statement of Cash Flows
Defining the Statement of Cash Flows
A statement of cash flows is a financial statement showing how changes in balance sheet accounts and income affect cash & cash equivalents.
Learning Objective
- Indicate the purpose of the statement of cash flows and what items affect the balance reported on the statement
Key Points
- In financial accounting, a cash flow statement is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents and breaks the analysis down to operating, investing, and financing activities.
- People and groups interested in cash flow statements include: (1) Accounting personnel, (2) potential lenders or creditors, (3) potential investors, (4) potential employees or contractors, and (5) shareholders of the business.
- The cash flow statement is intended to provide information on a firm's liquidity and solvency, improve the comparability of different firms' operating performance, and to indicate the amount, timing, and probability of future cash flows.
Terms
- solvency
The state of having enough funds or liquid assets to pay all of one's debts; the state of being solvent. - liquidity
An asset's property of being able to be sold without affecting its value; the degree to which it can be easily converted into cash.
In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business.
Statement of cash flows
Sample statement of cash flows.
The statement captures both the current operating results and the accompanying changes in the balance sheet. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard that deals with cash flow statements.
People and groups interested in cash flow statements include: (1) Accounting personnel who need to know whether the organization will be able to cover payroll and other immediate expenses, (2) potential lenders or creditors who want a clear picture of a company's ability to repay, (3) potential investors who need to judge whether the company is financially sound, (4) potential employees or contractors who need to know whether the company will be able to afford compensation, and (5) shareholders of the business.
The cash flow statement is intended to:
- Provide information on a firm's liquidity and solvency and its ability to change cash flows in future circ*mstances provide additional information for evaluating changes in assets, liabilities, and equity;
- Improve the comparability of different firms' operating performance by eliminating the effects of different accounting methods; and
- Indicate the amount, timing, and probability of future cash flows.
The cash flow statement has been adopted as a standard financial statement, because it eliminates allocations, which might be derived from different accounting methods, such as various timeframes for depreciating fixed assets.
