The statement of cash flow is a company’s financial statement indicating the inflow and outflow of cash and cash equivalents of the organization.
The objective of the statement of cash flow is to assess how well a company manages its cash position and to measure how quickly a company generates cash to repay its debt obligations. It also gives a rough gauge on how a company finances its business activities.
The statement of cash flow is not as significant when compared to the balance sheet and income statement, but it complements them. The investor can analyze the performance of the company based on how the company earns and spends its money according to the report of cash flow.
The statement of cash flow comprises of three sections that create and use cash which are:
1. Operating activity
- The activities refer to revenue-generating business projects.
- Eg. Interest and dividends received supplier and lender invoices, and payroll.
- An example of cash inflow from the operating activity is when your company sells five units of laptops, and you receive cash from them.
- An example of cash outflow from the operating activity is when you have to refund your customers some cash as two of the laptops they received are faulty.
2. Financing activity
- The activities show the net flow of cash to fund the company.
- Eg. The sale of the company’s shares, repurchase of shares, and dividend payments.
- An example, when the company sells its shares at $5.00 per unit to its shareholders, this will result in positive cash flow.
3. Investing activity
- It involves the long term use of cash.
- Eg. The purchase of fixed assets or the purchase or sale of securities by other entities.
- An example of investing activity is when the company purchases a spacious office building to fit all of their employees.
In the next article: Learn What is a General Ledger?