Accountant Search

The Concept Of Cash Flow Statement And Its Usefulness

The accounting cash flow statement basically means the flow of cash in and cash out of the business entity. Also known by the other names like funds flow statement, statement of cash flow, it shows the effect of the changes in the balance sheet accounts and the income on the cash as well as the cash equivalents and subsequently breaks the analysis down to operating, investing as well as financing activities The accounting cash flow statement captures both the current operating results along with the accompanying changes in the balance sheet. It is also used as the analytical tool that helps in determining the short term viability of a company, particularly in regards to its ability to pay the bills. The International Accounting standard 7 (IAS 7) is the international body that deals with the accounting cash flow statements.

The main purpose of the cash flow statement is to determine the liquidity of the company. There is a big difference between the cash flow statement as well as the balance sheet and the income statement. While the latter two reflect the accrual basis of accounting, the cash flow statement consists of only the inflows as well as the outflows of the cash and its equivalents. All the transactions that do not directly affect the cash receipts and the payments are not included in the cash flow statements. The cash flow statement is a cash basis report on the three types of the financial activities that are: investing activities, operating activities, as well as the financing activities. In the accounting cash flow statement the non-cash activities are usually reported in the footnotes of the statement.

Some of the main purposes that the cash flow statement solves are:

  1. It provides the information on the liquidity as well as the solvency of the firm and its ability to change cash flows in the future circumstances.
  2. It also has the ability to indicate the amount, time, and the probability of the future cash flows of the business.
  1. It also improves the comparability of the different firms’ operating performance by eliminating the effects that are created by the different accounting methods.
  1. It also gives the additional information for evaluating the changes in the assets, liabilities, and the equity.
The cash flow statements have been adopted as the standard financial statement as it has the ability to eliminate the allocations that might be because of the different accounting methods.