Free «Cash Flow Statement» Essay
Business entities are among the largest organizations in the society that need proper management and monitoring. This has been due to the constant growth and expansion of business activities around the world. In order to have a sound management of the business entities in place, various management tools have been developed in the field of accounting. Among these accounting tools is the cash flow statement. The main objective of this paper is to discuss the details of importance, components and purposes of cash flow statement.
According to Mtetwa (2011), cash flow statement is a summary of the cash receipts and payments of a business entity for a specific period of time. On the other hand, cash is the amount of money which is either paid or received in the course of the business transactions.
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The cash flow statement is important to a business in that it makes the business owner aware of his cash usage in terms of receipts and payments.It can also be used by the business owner to make further investments decisions depending on the level of cash receipts and payments. For instance, a business owner may decide to expand his or her business if the cash flow projections are positive. Finally, it helps the business owner to obtain loans from the financers since positive statements usually prove their ability to repay loans (Mtetwa, 2011).
According to Mulford & Comiskey (2005), the cash flow statement is also divided into three components. One is the Operating Activities section, where the activities generate income to the business entity, and cash receipts from sale of goods, commissions, and fees are recorded. Another activity under this component is cash payments which can be made to the suppliers, employees and other stakeholders. From this the net profit or loss can be determined by getting the difference between the two categories.
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Another component of cash flow statement is the Investing Activities section. This is the section, where the investing activities, involving acquisition and selling of fixed assets such as land and buildings, are recorded. They may include cash paid in acquiring fixed assets and the cash received during the disposal of fixed assets. It can also include the cash paid and received in acquiring and disposing stock. Finally, Financing Activities is the last section of the cash flow statement which records the changes in the composition of the owners’ capital and stock levels (Mulford & Comiskey, 2005).
In conclusion, despite the statement’s importance, its purpose is to show the business owner where cash is generated form and where it is spent in a specific period of time, which can be quarterly or annually. It also discloses other information regarding the amount of interest and that of taxes paid and the changes in financing and investing activities. Finally, it reconciles the other two financial statements: income statement and the statement of financial position.