The cash flow statement provides a detailed summary of how an entity has generated and utilised cash and cash equivalents over a specific reporting period.
For each reporting category, cash inflows (receipts) and outflows (payments) are recorded, with the net movement reported as either an increase or decrease in cash for that category. The cumulative net movement across all categories is added to the opening cash balance at the beginning of the period to determine the closing cash balance at the end of the period.
This financial statement is integral to a comprehensive financial analysis and should be reviewed in conjunction with the profit and loss statement and the balance sheet. Together, these reports offer a holistic view of an entity’s financial position and performance.
Functionality
The cash flow statement integrates data from the profit and loss statement and the balance sheet to present the current cash position. Unlike most financial statements, which are prepared on an accrual basis, the cash flow statement is reported on a cash basis.
Accrual-based net income from the profit and loss statement is adjusted to reflect cash by analysing changes in the balances of assets and liabilities.
Categories of Cash Flow
The cash flow statement is structured into three key sections, each representing distinct business activities:
- Operating Activities: These include cash flows related to the principal revenue-generating activities of the entity, encompassing cash receipts and payments associated with income, expenses, and changes in current assets and liabilities (excluding those reported in investing or financing activities).
- Investing Activities: This section captures cash flows from the acquisition and disposal of long-term assets, such as property, plant, equipment, and investments. It also includes cash movements related to security deposits and dividends received.
- Financing Activities: This section details cash flows associated with changes in equity and debt, including activities such as issuing or repurchasing shares, obtaining or repaying loans, and distributing dividends.
Formal financial reports are often accompanied by notes to the financial statements. These notes provide supplementary disclosures, such as detailed explanations of significant non-cash transactions or summarised line items reported in the profit and loss statement, balance sheet, and cash flow statement. Additional details may cover topics such as taxation, employee provisions, risk management, and related party transactions.
Importance
The cash flow statement is a critical tool for assessing the liquidity, solvency, and financial health of an entity. It highlights the entity’s ability to meet its financial obligations, sustain operations, and fund future growth.
Unlike the profit and loss statement and balance sheet, which present static figures at a specific point in time, the cash flow statement provides insights into the movement of cash and changes in the financial structure of the entity over the reporting period.
Key questions addressed by the cash flow statement include:
- How strong is the entity’s cash position?
- What is the entity’s long-term financial outlook?
- Which activities generate the most significant cash inflows?
- How does net income align with cash flows from operating activities?
To gain deeper insights into your financial statements, cash position, and outlook arrange an advisory session with us today. We are committed to helping you understand and leverage the strengths of your business.
