What the cash flow statement tell us |
In layman terms, the statement tells us how the business has generated cash and how cash was spend over a period of time. Since cash is considered the "life and blood of every business", the usefulness of such information can never be over stated. The cash flow statement is not just some historical document; it is very useful in determining the financing trends that can be used to predict the business' future behavior. Why have a cash flow statement?If the balance sheet and income statements have financial information, why have another financial statement? The reason we need a cash flow statement is that the other two financial statements shows the business' financial position. They reveal very little information on how the cash comes in and how it is used over a period of time. Such information can not be readily be derived from the income statement or the balance sheet. Also the fact that profits and cash generated are not always equal, it makes sense to get a picture of how such profits are generated or how loses occurs. In other words, your business could be bringing in a lot of cash, but that does not necessarily translate into higher profits if your costs are high. critical components of a cash flow statementFor a cash flow statement to be useful, it has to have the following components:
In the next few postings we will explore issues such as how to read and prepare this financial statement. Stay tuned... |
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