November 19, 2012
The Flow of Cash Flow Statements
What are cash flow statements and how does it help us accountants to understand better how cash come and go? In accounting terms, cash flow statements are financial statements that show accountants what changes in the balance sheet and how it affects daily businesses. It is also a tool where we can determine a short-term capability of a company and their ability to pay the bills. Fundamentally, the cash flow statement focuses the flow of cash that goes in and out of businesses. Cash flow activities consist of operating, investing, and financing activities. Not only accountants, but people are also interested in dealing with cash flow statements are lenders or creditors, investors, employees or contractors. Using the cash flow statement, accountants must know whether the business will be able to take care of payroll and other expenses, lenders or creditors want a clear picture of the possibility of repayment, investors need it to know whether the company is in good shape and last but not least, employees and contractors will need to know whether the company can afford reimbursement. It must be said that cash is the essential key that keeps a business running.
Since we already have balance sheets and income statements, most people would think it isn’t necessary to know where the cash goes and what happens to it. This would be the wrong judgment. Of course the balance sheet provides us with the details of financial assets and income statement provides the summary of the financial transactions over a certain period of time, but the cash flow statement shows the inflow and outflow of cash and cash equivalents. We want to know where our cash comes and goes and how it is being spent. That is why the cash flow statement exists. The purpose of having the cash flow statement is to provide information on a firm’s liquidity and solvency and its ability to change cash flows in future circumstances, evaluating changes in assets, liabilities, and equity, improve the operating performance by eliminating the effects of different accounting methods, and indicate the amount, timing, and probability of future cash flows.Although the cash flow statement shows financial activities, it also includes non-cash activities on the side. Why are cash flow statements important? ‘Like the expensive import, no matter how glamorous the product, no business can be successful without its fuel-cash-to keep it running.’Basically, in each firm, there must always be cash. Cash is what keeps it going. If firms run out of fuel, they are most likely to end up in bankruptcy or just stuck. Managers must learn how to plan out their cash comes and goes. For example, cars need gas to run. If the car runs out, the car won’t be able to move. It will be just stuck there. Fortunately, we have an option of refueling it. As long as we know how much gas we are using to travel and be prepare to refill, then there would be no stop. This would just be like the pink bunny with the batteries in the ads. We need batteries to continue on.

As mentioned above, cash flow statements run on three main financial activities. They are operating, investing, and financing activities. Money coming in is inflows and money going out is outflows. Let’s start with operating activities. Under operating, this activity will directly affect the inflows and outflows and determines the net income. It changes the items reported on the income statement from the addition basis of accounting to cash. The inflows of cash vary on the sales on goods or services, income earned on investments, etc. The outflows of cash vary on equipment and inventory purchases, interest and principal payments on loans, salaries, dividends, expenses, and other various factors. Cash from operations is measured in two ways: as estimated from the income statement by adding back depreciation and amortization; and as calculated and presented in the statement of cash flows. We