The main function and use of cash flow statement

In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.

The cash flow statement shows the sources of a company’s cash flow and how it was used over a specific time period. It is an important indicator of a company’s financial health, because a company can report a profit on its income statement, but at the same time have insufficient cash to operate.

A cash flow statement reconciles the difference between profit and cash. Therefore, it enables the user to provide additional information on business activities and assess the current liquidity of the company (Duhovnik, 2008).

The cash flow statement also shows the major sources of business cash flow for the business. For RJV, the major source of cash inflow is the financing sources such as ordinary shares.

The cash flow statement can also be used as a guide to determine the future cash flow of the company.

Lastly, it allows businesses to determine the cash flows that come from trading activities compared to other sources.

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
  • Company Directors, who are responsible for the governance of the company, and are responsible for ensuring that the company does not trade while insolvent
  • Shareholders of the company

Leave a Reply

Your email address will not be published. Required fields are marked *