The cash flow statement is a measure of a company'sfinancial health.The cash flow statement differs from these other
financial statements because it acts as a kind of corporate checkbook that
reconciles the balance sheet and income statement.The cash flow statement records the company's cash transactions,
both the inflows and outflows, during the given period.While an income statement can tell
you whether a company made a profit, a cash flow statement can tell you whether
the company generated cash.It shows whether
revenues booked on the income statement have actually been collected.At the same time, however, the cash flow
does not necessarily show all the company's expenses.Not all expenses the company accrues have to be paid right
away.So even though the company may
have incurred liabilities it must eventually pay, expenses are not recorded as
a cash outflow until they are paid.
The most commonly used format for the cash flow statement is
broken down into three sections:
flows from operating activities.These flows are related to your principal line of business and
include the cash receipts from sales or for the performance of services, payroll and
other payments to employees, payments to suppliers and contractors, rent
payments, payments for utilities, and tax payments.
flows from investing activities.These
are capitalized as assets on the balance sheet. Investing activities
also include investments that are not part of your normal line of
business. These cash flows could also include purchases of
property, plant and equipment, proceeds from the sale of property, plant
and equipment, purchases of stock or other securities other than cash
equivalents, and proceeds from the sale or redemption of investments.
flows from financing activities.Theseflows relate to the businesses debt or equity financing.They include proceeds from loans, notes, and other
debt instruments, installment payments on loans or other repayment of
debts, cash received from the issuance of stock or equity in the business,
and dividend payments, purchases of treasury stock, or returns of capital.
Cash for purposes of the cash flow statement normally
includes cash and cash equivalents. Cash equivalents are short-term,
temporary investments that can be readily converted into cash, such as
marketable securities, short-term certificates of deposit, treasury bills, and
commercial paper. The cash flow statement shows the opening balance in
cash and cash equivalents for the reporting period, the net cash provided by or
used in each one of the three categories just described, the net increase or
decrease in cash and cash equivalents for the period, and the ending balance.
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