IMPORTANCE OF CASH FLOW STATEMENTS
Cash flow statement is a part of financial statements summarizing the position of Cash Inflows and Cash Outflows of a business.
It reflects a clear picture of the sources and applications of cash and helps to understand the actual liquidity position of the company.
It shows how well the company generates cash to pay its debt obligations and fund its daily operational expenses
Structure : A Cash Flow Statement should be outlined under three major heads of activities , viz:
- Cash from Operating Activities
- Cash from Investing Activities
- Cash from Financing Activities
Effect of Changes in Working Capital on Cash Flow Statement :
Accounts Receivables :
Increase in balance of accounts receivables denotes that business has not collected its outstanding from its debtors. Thus there is no cash inflow and indirectly it is a cash outflow. On the other hand, decrease in balance of accounts receivables denotes that business has received collections from its debtors thereby increasing the cash inflow.
Accounts Payables :
Increase in balance of accounts payables shows that business it yet to pay to its creditors for purchases made from them. This in turn denotes that there is no cash outflow and thus the said increase in amount of account payables can be considered as an indirect cash inflow. On the other hand, decrease in balance of accounts payables means that business has paid off its liability towards their creditors thereby resulting in direct cash outflow.
Inventory balances :
Increase in balance of inventory items denotes that business has invested in purchasing the stock of the goods. Thus there is a direct cash outflow. On the other hand, decrease in balance of inventory denotes that business has cleared its stock by way of sale and generated income thereby increasing the cash inflow.
