Cash Flow Statement Analysis: Finance, Accounting, and Business

This report provides a comprehensive analysis of the cash flow statement, a crucial financial tool that complements the income statement and balance sheet by offering insights into a company's cash position. It emphasizes that the cash flow statement presents information not available in the other two statements because it is prepared on a cash basis rather than the accrual basis. The report defines the cash flow statement as a summary of cash inflows and outflows over a specific period, highlighting its usefulness for short-term financial planning, cash budgeting, and the analysis of cash receipt and payment trends. The report also explains the components of a cash flow statement: operating activities, which involve revenue-generating activities; investing activities, which relate to the purchase and sale of long-term assets; and financing activities, which involve changes in capital and borrowing. The report also highlights the role of the cash flow statement in assessing a company's liquidity and short-term viability.

It is correctly said that the Cash Flow Statement provides such information that the
Income Statement and Balance Sheet do not provide. This is because the Income
Statement and Balance Sheet are prepared on the accrual basis of accounting.
A cash flow statement is a statement showing inflows (receipts) and outflows (payments)
of cash for a particular period. It is a summary of sources and applications of cash during
a particular span of time. It analyses the reason for change in the balance of cash between
the two balance sheet dates. The term ‘cash’ here stands for cash and cash equivalents. A
cash flow statement includes only those items which affect cash. There are certain
objectives of preparing cash flow statement which includes its usefulness for short term
financial planning, usefulness for preparing the cash budget, study of the trend of cash
receipts and payments, helpful in ascertaining cash flows from various activities
separately etc. The term cash and cash equivalents includes cash in hand, cash at bank,
short term deposits, short term investments, marketable securities and cheques and draft
on hand. Cash flow statement can be prepared using the direct or indirect method.
Cash flow statement is classified into three activities which include (1) cash flow from
operating activities, (2) cash flow from investing activities, (3) cash flow from financing
activities. Operating activities are the main revenue generating activities of an enterprise.
As such, they include cash flows from those transactions and events which enter into the
ascertainment of net profit/loss of the enterprises like cash receipt from sale of goods and
rendering of services. Investing activities include the purchase and sale of long term
assets such as land, buildings, plant and machinery etc. These activities also include the
purchase and sale of such investments which are not included in cash equivalents like
sale of shares or debt instrument of other enterprises. Financing activities are the

activities that result in the change in capital and borrowing of the company like cash
receipt from issuing shares or other similar instruments.
The cash flow statement is the best available resource with the company to test its
liquidity. It shows the change in cash and cash equivalent over the time rather than
absolute amount at a point of time and also useful for determining the short term viability
of the company.
This course of accounting cycle helps in enlarging the basic concepts of accounting and
also works as a base in learning the more advance concepts of accounting. It helped in
understanding the whole process from the capturing of data in form of business
transaction up to processing of such transaction in form of financial statements.