Topic: BusinessAccounting

Last updated: April 2, 2019

flow statement can be defined as a financial statement which summarizes the amount of cash and equivalents entering or leaving the organisation, company or enterprise. It is often used alongside two other key reports – the Profits and Loss Account and the balance Sheet. It is the third component of the Company’s financial statement. The Cash flow statement measures how well the company manages its cash position, meaning how well the company generates cash to pay its obligations and liabilities and also to fund its operating expenses. For this reason, the importance and significance of the cash flow statement can not be over emphasized. Hence, in the preparation of a firm’s financial reports, the cash statement is indispensable for the following reasons: 1. The cash flow statement aids investors n understanding how a company runs its operations by showing how funds are generated and how same funds are spent. This will therefore reveal to the investors the financial position and strength of such company. 2. Similarly, the cash flow statement also aids the creditors of the company in the determination of how much cash is at the disposal of the company in servicing its obligations and debts. 3. Cash flow statements provides better key performance indicators (KPIs) when compared to other traditional financial accounting recording systems. Key performance indicators are quantifiable measures used to evaluate the success of an organisation or a particular activity in which it engages in. 4. The cash flow statement provides the owners and managers with the necessary insights into the cash position of the company which consequently aids in the making of informed decisions regarding the company’s business operations, its further investments, growth and expansion etc 5. The Cash flow statement also aids or assist the internal management of the company in the determination of the financial policies to be adopted by the company in future considering the financial information it provides. 6. Accurate knowledge of the company’s inflows and outflows of cash not only ensures timely investments and cash availability for investment opportunities, but also ensures timely payment of expenses and debt. 7. The information provided by the cash flow statement concerning the company’s inflows and outflows of cash, helps the company in making cash forecasts for its operations in the near future. Also, the preparation of such forecasts are easier and more useful when compared to the profit forecast 8. A proper understanding of the cash flow statement by the management of the company ensures consistent level of business income without relying on external investment in form of loans, credit facilities or cash borrowing. 9. Cash flow statement helps in the prevention and monitoring of debt, hence, focusing the company’s view on the creation of excess cash. 10. Cash flow statement or reporting provides or creates a better way of making comparisons of the results of different companies when compared to other traditional means of financial reporting. 11. The auditing of the cash flow statement and accounts seem seamless and easier when compared to conventional financial accounts due to the accruals concept it adopts. The afore-mentioned, are some of the reasons which make the cash flow statement indispensable in any business entity or company.


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