Objectives of Cash Flow Statement: Top 8 Objectives

A cash flow statement separately highlights the Cash flow from operating, investing, and financing activities. It does so by indicating how much cash has been generated or used in these activities. The transactions of a cash flow statement are categorised into three activities; namely, Cash flow from Operating Activities, Cash flow from Investing Activities, and Cash flow from Financing Activities. The Institute of Chartered Accountants in India has issued Accounting Standard AS – 3 revised for the preparation of cash flow statements. Besides, with the introduction of the Companies Act 2013, the preparation of a Cash Flow Statement is now mandatory for every type of company except OPC (One Person Company) [Section 2(40)].

‘Cash Flows’ implies the movement of cash in and out due to some non-cash items. Receipt of cash from a non-cash item is termed as cash inflow while cash payment in respect of such items as cash outflow. With the help of inter-firm and intra-firm cash flow statements, a firm can also get to know about its liquidity position; i.e., whether its liquidity position is improving or deteriorating over a period of time. It can also compare its liquidity with other organisations over a period of time. A cash flow statement reveals the speed at which the current liabilities are being paid and cash is being generated from inventory, trade receivables, and other current assets by the company. By doing so, the management of the company can easily assess its true position of cash in future.

In contrast, when interest is given to bondholders, the company decreases its cash. Transactions in CFF typically involve debt, equity, dividends, and stock repurchases. Cash-out items are those changes caused by the purchase of new equipment, buildings, or marketable securities. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.

Incomplete Analysis

It focuses on the speed of cash being collected from debtors, stock, and other current assets, as well as the use of cash in paying current liabilities. In other words, it does not consider those transactions which do not affect the cash e.g., issue of shares against the purchase of fixed assets, conversion of debentures into equity shares, etc. For instance, if a company realizes that it will have a cash shortfall in the next month, it can take steps to ensure enough funds are available.

Determine the Reporting Period

This method of calculating cash flow takes more time since you need to track payments and receipts for every cash transaction. Items that are added or subtracted include accounts receivables, accounts payables, amortization, depreciation, and prepaid items recorded as revenue or expenses in the income statement because they are non-cash. The primary purposes and uses of the statement of cash flows is to indicate the firm’s management strategy and future outlook.

Because of its clarity, a cash flow statement is considered an important document demanded by regulators and investors. The Cash Flow Statement is a mandatory record of an organisation’s financial reports. It records the amount of cash and cash equivalents entering and leaving an organisation in a given time period. Thus it is a statement which shows the change in cash balances during a specified period. The Cash Flow Statement enables investors to comprehend how an organisation is performing in terms of its operations, the source of its money resources and how the available cash is utilised. Cash is the lifeblood of any organization, and a company needs to have a good handle on its cash inflows and outflows in order to stay afloat.

Changes in cash from investing are usually considered cash-out items because cash is used to buy new equipment, buildings, or short-term assets such as marketable securities. But when a company divests an asset, the transaction is considered cash-in for calculating cash from investing. For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing. It provides information about all the activities of an organisation classified as operating, investing, and financing activities.

Difference Between Funds Flow Statement and Cash Flow Statement

The cash flow statement will not present the net income of a company for the accounting period as it does not include non-cash items which are considered by the income statement. In the above example, the business has net cash of $50,049 from its operating activities and $11,821 from its investing activities. It has a net outflow of cash, which amounts to $7,648 from its financing activities.

Therefore, it does not evaluate the profitability of a company as it does not objectives of cash flow statement consider all costs or revenues. Decide whether you will use the direct method or the indirect method to prepare the CFS. Take self-paced courses to master the fundamentals of finance and connect with like-minded individuals. Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise.

This section records the cash flow between the company, its shareholders, investors, and creditors. From this CFS, we can see that the net cash flow for the 2017 fiscal year was $1,522,000. The bulk of the positive cash flow stems from cash earned from operations, which is a good sign for investors. It means that core operations are generating business and that there is enough money to buy new inventory. Changes in cash from financing are cash-in when capital is raised and cash-out when dividends are paid.

A Cash flow statement shows the inflow and outflow of cash and cash equivalents from various activities of a company during a specific period. The movement of cash & cash equivalents or inflow and outflow of cash is known as Cash Flow. Cash inflows are the transactions that result in an increase in cash & cash equivalents; whereas, cash outflows are the transactions that result in a reduction in cash & cash equivalents. Hence, a statement showing flows of cash & cash equivalent during a specified time period is known as a Cash Flow Statement. Simply put, a cash flow statement is a summary of different sources and applications of cash during a specific time period and analyses the reasons behind changes in cash balance between the two balance sheet dates.

1. The primary purposes and uses of the statement of cash flows is to indicate the firm’s management strategy and future outlook.
2. It produces what is called the net cash flow by breaking down where the changes in the beginning and ending balances came from.
3. A cash flow statement (CFS) is a financial statement that captures how much cash is generated and utilized by a company or business in a specific time period.
4. This method of calculating cash flow takes more time since you need to track payments and receipts for every cash transaction.

In the case of a trading portfolio or an investment company, receipts from the sale of loans, debt, or equity instruments are also included because it is a business activity. These are the principal revenue-generating activities (or the main activities) of the enterprise and these activities are not investing or financing activities. By itself, it cannot provide a complete analysis of the financial position of the firm. Liquidity is also affected by the assets which can be easily converted into cash. The exclusion of these assets obstructs the true reporting of the ability of the firm to meet its liabilities. Read this article to learn about the top eight objectives of cash flow statement.

Even though it recognizes that sale as revenue, the company doesn’t yet have the cash. Nevertheless, it earns a profit on the income statement and pays income taxes on that profit. If it does this too often, it faces the danger of running out of cash despite technically being profitable. By analyzing cash flow, individuals and businesses can identify trends, anticipate cash shortages or surpluses, and make informed financial decisions. Positive cash flow allows for reinvestment, expansion, and financial stability, while negative or insufficient cash flow may require adjustments to spending, financing, or operations. Using this method, cash flow is calculated through modifying the net income by adding or subtracting differences that result from non-cash transactions.