The “statement of cash flows” also known as the cash flow statement, is a financial statement that summarizes and gauges the overall financial health of the company. In other words, it analyzes and provides information regarding the inflow and outflow of cash and cash equivalents in the company. The statement of cash flow complements the balance sheet and profit and loss or other comprehensive income statement and is an important and mandatory part of the financial reports.
An outflow of cash occurs when a company transfers funds to another party either physically or electronically as a part of a business transaction or its own expenses. A cash inflow is the opposite if any transfer of money that comes into the company’s possession i.e. from sales, investors etc.
The following is a list of the various areas of the cash flow statement and what they mean:
- Cash flow from operating activities. This section measures the cash used or provided by a company’s normal operation. It shows the company’s ability to generate consistent positive cash flow from operations. Think of normal operations as the core business. Depreciation on property, plant, and equipment, increase decrease in investment property, deposits, advances, related party, trade & other payables, Employee terminal benefits, accrued expenses and provisions, etc. are covered in operating activities.
- Cash flows from investing activities. This area lists all the cash used or provided by the purchase and sale of income-producing assets. As per IFRS, purchase or sale of property, plant and equipment, interest income, loans made to suppliers, payments related to mergers and acquisitions, adding to capital work-in-progress, etc. are covered in investing activities.
- Cash flows from financing activities. This section measures the flow of cash between a firm and its owners and creditors. Negative numbers can mean the company is paying off debt, but they can also mean the company is making dividend payments and stock repurchases, which will satisfy investors. Movement in current accounts, Loan from shareholders, interest, management fee, dividends paid, repurchase of company shares, debt principal, including capital leases, repayment of lease liability, etc. are covered in financing activities.