Cash Flow Statement: Importance, Pros and Cons, and Managerial Decisions

This article discusses the importance of cash flow statement, its advantages and disadvantages, and how it helps in managerial decisions. It also explains the reasons for using the statement, its pros and cons, and the decisions taken by managers based on it.

Cash flow statement

CASH FLOW STATEMENT 1
Cash Flow Statement
Cash flow statement is a financial statement that shows the changes in balance sheet
accounts and income affect cash and cash equivalents (CFI, 2018). In this statement, inflow
and out flow of cash is evaluated as per the three activities such as operating, financial and
investing. It is an analytical tool which is used to evaluate the short-term profit of a company.
The money comes in the organisation is known as cash inflow and money going out from the
organisation is known as cash out flow. There are three activities are mentioned in the
statements with the name of cash flow from operating activities, investing activities, and
financing activities. Operating activities of statements includes the production, sales and
delivery of the products of the business and which helps to collect the payments from its
customer. Investing activities states that the investment in asset, loans and acquisition
furniture. It includes the sale of an asset, loans, and payments of acquisition. Financing
activities states the inflow and outflow cash from investors or stakeholders. The activities that
have a positive impact the long-term liabilities and equity of the company are also counted in
in the financing activities (Baik, Cho, Choi, & Lee, 2016). The statement helps to evaluate
the ability of the company to pay bills. Potential lenders, investors, employees, shareholders,
and accounting personnel are the people who are interested in the cash flow statement.
In the report the discussion is made on the topic of cash flow statement. In the
beginning of the report, the reasons for using the cash flow statement will be mentioned.
Advantage and disadvantage of cash flow statement and the concept of taking decision on the
basis of statement will also be mentioned at the end of the report.

CASH FLOW STATEMENT 2
Reasons for using the statement
Cash is a major factor of the business without the cash transaction the company would
not operate in the market. There are few financial statements which helps the company in
evaluating the cash transaction on the regular basis. Cash flow statement is one of good
consolidated indicator which helps to evaluate the inflow and outflow of cash. There are
many reasons which state that the cash flow statement is necessary for the company. The
reasons behind the cash flow statements are discussed below:
Financial decision
The company have to take the financial decision so that they grow in the market. The
company requires the high amount at the time of buying capital equipment. The company has
to take the financial decision so that they can manage their budget as per the requirement. It is
necessary for the company to know about the financial position so that they can develop the
budget and buy the capital equipment. Cash flow statement contains all the information
related to incomes and expenses. It helps to evaluate the financial position of the company
which is required to evaluate (Altima Business Solutions, 2018).
At the time of growing the company, the company requires the huge amount for the
further investments. The company manage the cost by taking the loans from banks or by
influencing the investors so that they can invest. Sometimes company requires the excess
cash provided from profits. The cash flow statement helps to understand that where the cash
goes, when the company need it and how it can manage. The cash flow statement contains the
whole information which reflects that it is essential for the company to use this statement take
the big financial decision (Investing Answers, 2018).
Creating excess cash

CASH FLOW STATEMENT 3
Profit is the main motive of the company and it is important thing to create the cash.
There are many other things which help to create cash. The other way of creating cash is to
reducing expenses and increasing the investment for the high return. The high return helps
the company in growing in the market. For this, the company requires the information
regarding the operating expenses and investing activities (Collier, 2015).
The cash flow statement contains the operating and investing activities which help the
company in creating cash by collecting the cash from bill receivable. Focussed only on the
profit and loss statement makes it difficult to focus on cash and other activities. The cash
flow statement works as a key performance indicator which helps to evaluate the
performance of the company (Mishra, 2018).
Short-term analysis
The cash flow statement is more useful for the company as compare to the other
financial statements. The cash flow statement is more appropriate than fund flow analysis for
the short-term financial analysis. In the very short time period, the cash flow statement
analyse the financial position of the company which is biggest role of the statement. The
company requires to evaluating the financial position so that they can forecast the capacity of
the firm to meet its immediate obligations. The company uses the cash flow statement to
analyse their financial position in the very short time period (Invoice Berry, 2018).
Broad picture of company finance
Yes, the cash flow statement gives a broad picture of financial account of the
company. A cash flow statement is a financial statement which helps to evaluate the sources
of cash and how that the cash was spent. It has been seen that the statement does not include
the non-cash items of the business such as depreciation. It also helps the company to

CASH FLOW STATEMENT 4
determine its capability to pay the bills. Determination of financial condition is necessary to
evaluate every per year but short term is also essential for the company to evaluate the day to
day expenses because management of cash inflow and outflow is crucial for the businesses. It
is recommended that the every company has to evaluate the financial condition by studying
the cash flow statement at least every quarter.
The cash flow statement is similar to the income statement because it also helps to
records the activities of the company in certain period of time. The incomes statement is
prepared by the company to determine the financial position of the company. Thus, the cash
flow stamen also plays the role as the income statement. The difference between the income
statement and cash flow statement is that the cash inflow statement does not include the non-
cash transaction but the incomes statement does. The cash flow statement determine exactly
actual money has been generated by the company. The statement shows that how company
manage their cash by inflows and outflows. It provides a clear picture of the company
financial condition to pay the creditors and finance growth. The growth of the company is
depending on the financial condition of the company which is measured by the statement
because it records all cash transaction related to business (Lewellen, & Lewellen, 2016).
The statement is prepared as per the accounting standard which states the
appropriation of the accounts. Comparing the sum of cash generated to outstanding debt is
called the operating cash flow ratio. It is necessary to compare the cash with the outstanding
debt so that the company can measure their profit. All the financial accounts are prepared by
the company to maintain the all records related to business. The cash flow statement contains
the whole information in one statement related to cash without any further accounts. The
statement divides into three sections such as operating, investing and financing in which the
transactions are divided into the different parts as per the standard. It makes the work easy for

CASH FLOW STATEMENT 5
the company to identify the details for the particular accounts. Different parts of the statement
maintain the different accounts which are beneficial for the company.
The cash flow statement tells the whole information whether it has cash or it does not.
It analyse the company very closely in order to understand the overall capacity. It is similar
as the other financial statement because it also determines the financial conditions of the
company. Thus, the cash flow statement states the clear picture of financial accounts of the
company.
Pros and cons
Pros
 The cash position of the company is evaluated by the cash flow statement. The profits
and loss account and the balance sheet are unable to show the cash report. It is
essential to prepare the cash flow report to determine the liquidity position of the
company so that the company it helps to understand the position more clearly
(Edupristine, 2018).
 The advantage of the cash flow statement is that it helps to prepare the accurate
records related to the liquidity position of the company. The financial account is
included in the statements and there is no need to prepare the further account to
analyse the financial account. It can help the company in earning the extra return out
of the funds.
 The main pros of preparing the cash flow statement are to analyse the financial
position of the company. The statement justifies the financial position of the company
by including the whole information of accounts (Epstein, & Yuthas, 2017).
 The actions of this statement play the role like a filter which is used by many
investors to analyse that the company is preparing the financial statement properly or

CASH FLOW STATEMENT 6
not. If there is any discrepancy founded then it means the financial statements
prepared by the company are incorrect.
Cons
 The cash flow statement includes the cash transaction but it is not includes the non-
cash transaction. It is limited at the cash transaction but the information related to
non-cash transaction is not evaluated in this statement (Money matters, 2018).
 It is not possible to evaluate the profit and loss by looking into the statement. It
requires the knowledge and time to understand the statement and the financial
position of the company.
 The statement is limited and it is requires the other financial statements like profit and
loss statement and balance sheet for the business information. It identify the position
but does not are not clarify the reasons behind it (Miao, Teoh, & Zhu, 2016).
Decision taken by manager
The cash flow statement simply states that the financial condition of the company due
to which the manager can take the decision easily. There are many decision taken by the
managers are as follows:
Allocate the human resource
The manager of the company can take the decision about the human resources. The
financial statement of the company helps the manager in understanding the profit and loss.
Profit and loss of the company helps the manager in understanding the outflow of cash.
Human resource is the main asset of the company and it is necessary for the company to
provide the money to them. The manager can take the decision about the allocation of profit
in the human resource (Wild, 2017).

CASH FLOW STATEMENT 7
Continue or discontinue activities
There many activities which consume and generate the cash which directly affect the
statement of the company. There are certain activities which is measurable in terms of cash
and which directly affect the position of the company. The manager can take the decision as
per the financial position of the company. If the company is not in the strong financial
position then the manager cannot invest more and vice-versa (Weber, 2018).
Purchase or rate of capital equipment
Production of goods and services are the main function of the company. The company
requires the machines and equipment’s for manufacturing of goods. Capital equipment’s
consume high cost that is why it is necessary to evaluate the financial condition of the
company. The manager can take the decision regarding the purchasing of capital equipment
on the basis of cash flow statement (Patrick, 2018).

CASH FLOW STATEMENT 8
References
Altima Business Solutions. (2018). How Do Financial Statements Help Your Decision
Making?. Retrieved from:
http://www.altimabusinesssolutions.com/index.php/2016/08/29/financial-statements-
decision-making/
Baik, B., Cho, H., Choi, W., & Lee, K. (2016). Who classifies interest payments as financing
activities? An analysis of classification shifting in the statement of cash flows at the
adoption of IFRS. Journal of Accounting and Public Policy, 35(4), 331-351.
CFI. (2018). Statement of Cash Flows. Retrieved from:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/statement-of-
cash-flows/
Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for
decision making. John Wiley & Sons.
Edupristine. (2018). advantages and disadvantages of Cash flow statement. Retrieved from:
https://www.edupristine.com/blog/tags/advantages-and-disadvantages-of-cash-flow-
statement
Epstein, M. J., & Yuthas, K. (2017). Cash flow training and improved microfinance
outcomes. Journal of International Development, 29(1), 106-116.
Investing Answers. (2018). Cash Flow Statement. Retrieved from:
https://investinganswers.com/financial-dictionary/financial-statement-analysis/cash-
flow-statement-2786

CASH FLOW STATEMENT 9
Invoice Berry. (2018). What is a Cash Flow Statement?. Retrieved from:
https://www.invoiceberry.com/accounting-terms/cash-flow-statement
Lewellen, J., & Lewellen, K. (2016). Investment and cash flow: New evidence. Journal of
Financial and Quantitative Analysis, 51(4), 1135-1164.
Miao, B., Teoh, S. H., & Zhu, Z. (2016). Limited attention, statement of cash flow disclosure,
and the valuation of accruals. Review of Accounting Studies, 21(2), 473-515.
Mishra, S. (2018). Uses of Cash Flow Statement: 9 Uses | Financial Analysis. Retrieved
from: http://www.yourarticlelibrary.com/accounting/cash-flow-statement/uses-of-
cash-flow-statement-9-uses-financial-analysis/67113
Money matters. (2018). Limitations of Cash Flow Statements. Retrieved from:
https://accountlearning.com/limitations-of-cash-flow-statements/
Patrick, J. (2018). 4 Reasons A Cash Flow Statement Is Important. Retrieved from:
http://www.stage2planning.com/blog/bid/60143/4-reasons-a-cash-flow-statement-is-
important
Weber, M. (2018). Cash flow duration and the term structure of equity returns. Journal of
Financial Economics, 128(3), 486-503.
Wild, T. (2017). Best practice in inventory management. Oxon: Routledge.

CASH FLOW STATEMENT 10
Bibliography
Journals
Baik, B., Cho, H., Choi, W., & Lee, K. (2016). Who classifies interest payments as financing
activities? An analysis of classification shifting in the statement of cash flows at the
adoption of IFRS. Journal of Accounting and Public Policy, 35(4), 331-351.
Chang, X., Dasgupta, S., Wong, G. & Yao, J. (2014). Cash-flow sensitivities and the
allocation of internal cash flow. The Review of Financial Studies, 27(12), pp.3628-
3657.
Collins, D. W., Hribar, P., & Tian, X. S. (2014). Cash flow asymmetry: Causes and
implications for conditional conservatism research. Journal of Accounting and
Economics, 58(2-3), 173-200.
Epstein, M. J., & Yuthas, K. (2017). Cash flow training and improved microfinance
outcomes. Journal of International Development, 29(1), 106-116.
Foerster, S., Tsagarelis, J., & Wang, G. (2016). Are Cash Flows Better Stock Return
Predictors Than Profits?. Financial Analysts Journal, 73(1), 73-99.
Gordon, E.A., Henry, E., Jorgensen, B.N. & Linthicum, C.L. (2017). Flexibility in cash-flow
classification under IFRS: determinants and consequences. Review of Accounting
Studies, 22(2), pp.839-872.
Lewellen, J., & Lewellen, K. (2016). Investment and cash flow: New evidence. Journal of
Financial and Quantitative Analysis, 51(4), 1135-1164.
Miao, B., Teoh, S. H., & Zhu, Z. (2016). Limited attention, statement of cash flow disclosure,
and the valuation of accruals. Review of Accounting Studies, 21(2), 473-515.

CASH FLOW STATEMENT 11
Uwonda, G., & Okello, N. (2015). Cash flow management and sustainability of small
medium enterprises (SMEs) in Northern Uganda. International Journal of Social
Science and Economics Invention, 1(03), 153-to.
Weber, M. (2018). Cash flow duration and the term structure of equity returns. Journal of
Financial Economics, 128(3), 486-503.
Weber, M. (2018). Cash flow duration and the term structure of equity returns. Journal of
Financial Economics, 128(3), 486-503.
Websites
Altima Business Solutions. (2018). How Do Financial Statements Help Your Decision
Making?. Retrieved from:
http://www.altimabusinesssolutions.com/index.php/2016/08/29/financial-statements-
decision-making/
CFI. (2018). Statement of Cash Flows. Retrieved from:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/statement-of-
cash-flows/
Edupristine. (2018). advantages and disadvantages of Cash flow statement. Retrieved from:
https://www.edupristine.com/blog/tags/advantages-and-disadvantages-of-cash-flow-
statement
Investing Answers. (2018). Cash Flow Statement. Retrieved from:
https://investinganswers.com/financial-dictionary/financial-statement-analysis/cash-
flow-statement-2786
Invoice Berry. (2018). What is a Cash Flow Statement?. Retrieved from:
https://www.invoiceberry.com/accounting-terms/cash-flow-statement

CASH FLOW STATEMENT 12
Mishra, S. (2018). Uses of Cash Flow Statement: 9 Uses | Financial Analysis. Retrieved
from: http://www.yourarticlelibrary.com/accounting/cash-flow-statement/uses-of-
cash-flow-statement-9-uses-financial-analysis/67113
Money matters. (2018). Limitations of Cash Flow Statements. Retrieved from:
https://accountlearning.com/limitations-of-cash-flow-statements/
Patrick, J. (2018). 4 Reasons A Cash Flow Statement Is Important. Retrieved from:
http://www.stage2planning.com/blog/bid/60143/4-reasons-a-cash-flow-statement-is-
important
Books
Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for
decision making. John Wiley & Sons.
Wild, T. (2017). Best practice in inventory management. Oxon: Routledge.