Financial and Cost Accounting, Taxes and Economic

A cash flow statement or statement of cash flows is a financial statement that shows a company's incoming and outgoing money (sources and uses of cash) during a time period (often monthly or quarterly). The statement shows how changes in balance sheet and income accounts affected cash and cash equivalents, and breaks the analysis down according to operating, investing, and financing activities.
The statement of cash flows is made because the income statement is prepared under the accrual basis of accounting, the revenues reported may not have been collected. Similarly, the expenses reported on the income statement might not have been paid.

The cash flow statement is distinct from the income statement and balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded on credit. Therefore, cash is not the same as net income, which, on the income statement and balance sheet, includes cash sales and sales made on credit.
People and groups interested in cash flow statements include:
• accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses
• potential lenders or creditors, who want a clear picture of a company's ability to repay
• potential investors, who need to judge whether the company is financially sound
• potential employees or contractors, who need to know whether the company will be able to afford compensation
Cash flow is determined by looking at three components by which cash enters and leaves a company: operations, investing and financing.

1. OPERATIONS
Operating activity means core business operations of the company. The operations component of cash flow reflects how much cash is generated from a company's products or services. The cash flow from this component would be an indicator that determined whether the operating company can give enough cash flow to pay their debts, pay operating expense, devidend and possibly to make a new investment without external financing.
This section of the cash flow statement reports the company's net income and then converts it from the accrual basis to the cash basis by using the changes in the balances of current asset and current liability accounts, such as: account receivable, inventories, supplies, prepaid insurance, wages payable, other current assets, and other current liabilities.
2. INVESTING

This section of cash flow statement is needed to describe cash inflows and outflows relates with the resources that can produce earning and cash flow for the future. The examples are:
a) Buying fixed assets
b) The cash inflows from selling fixed assets

3. FINANCING
This section of the cash flow statement reports changes in balances of the long-term liability and stockholders' equity accounts, such as: bonds payable, common stocks, retained earnings.

On the next posting we will discuss how to make cash flow statement;).