Where have you heard about cash flow statements?
Typically, publicly traded companies publish their cash flow statements in quarterly or annual reports.
You may have heard about the cash flow statements for at least a few times before. These usually come across when the Financial Times or other financial news sources cover some major companies reporting their financial reports.
Moreover, your investment manager or financial advisor may have recommended keeping your eye on the cash flow statements of theyour chosen company when making investment decisions.
What you need to know about cash flow statements…
Every publicly-traded company must file financial statements and reports with the Securities and Exchange Commission in the US and other financial regulators alike worldwidein other countries. The principal financial statements are the income statement, balance sheet and cash flow statement.
Sometimes, even very profitable businesses may fail to adequately manage their cash flow. According to its income statement, a company may show the most fantastic performance backed by huge profits. Yet, it may have nothing left in the bank.
This situation could occur if a company was not monitoring its cash flows or all or most of its sales have been made on credit.
For example, imagine a company that sells goods. It decides to extend credit for the sale to its customers. Even though the company recognises that sale as revenue, it will not receive cash until later in the future. The business adds this profit on its income statement and pays income taxes on it. However, the company may generate more or less cash than the sales or income figures show.
That is the reason behind the cash flow statement being a crucial tool used by companies, investors and analysts to conduct accurate evaluations.
The three main types of cash flow statement components are:
- Cash from financing activities.
- Cash from operating activities;
- Cash from investing activities;
Sometimes, disclosure of non-cash activities may be included when prepared under GAAP, the generally accepted accounting principles.
The cash flow statement is believed to be one of the most intuitive financial statements as it follows the cash made by the business through three main ways: operations, financing and investment. The sum of these three segments is known as net cash flow.
A company’s financial statements offer investors and analysts insight into all the transactions that go through a company, where every transaction contributes to its success. It provides them with key information that should be considered when making investment decisions. Creditors, on the other hand, tend to use the cash flow statement to determine how much cash is available for the company to fund its operating expenses and pay its debt obligations.
By capital.com
