Statement of Cash Flows and its Significance

The statement of cash flows is a description of cash inflows as well as outflows for a firm subject to three classes of activities namely; operating activities, investing activities and financing activities. The operating activities generally involve the transactions in the typical business operations of the firm. The investing activities includes the cash flows that result from purchases and sales of securities, property plant and equipment, while financing activities shows the cash flows that ensue from transactions with owners and lenders which are funds received from lenders, contributions of capital owners such as sale of stock, payments of dividends, and payments made to lenders (Florentina-Simona, 2010). The cash flow statement serves as a reticulate of the actual as well as anticipated ingoing and outgoing of cash in an enterprise over a specified period. It evaluates the amount, predictability, and timing of cash inflows and cash outflows and is instrumental in forming the foundation for business planning and budgeting (Hamman, 1994).

Used in conjunction with other financial statements, the cash flow statements allows the provision of information that serves as a tool of evaluating the changes in the net assets of a firm, its financial structure with the inclusion of solvency and liquidity, and its capability to affect the timing and amounts of cash flows in a bid to adopt to the changing business environment and opportunities (Florentina-Simona, 2010). The cash flow statement is vital in the appraising the ability of a business in the generation of cash and cash equivalents and enable the business owners in evaluating and comparing the present value of its future cash flows of various enterprises. In addition, the cash flow statement encourages the comparability of the reporting of the operating performance by various business operations since it eradicates the effects of employing various accounting approaches for the same events and transactions (Florentina-Simona, 2010).

Using a personal cash flow statement in combination with personal net value account provides an enhanced scheme of one’s general financial wellbeing (Hamman, 1994). Blending personal net worth statement and cash flow statement with a financial risk test and debt analysis aid one in getting a vivid depiction of personal financial vigor. A personal financial statement will encapsulate income, expenses and net cash flow.

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