Importance of Preparing a Cash Flow Statement

The annual report is one of the most important financial documents published by a company. It includes the balance sheet, the income statement and the cash flow statement. Preparing a cash flow statement is critical in order to show investors how the company uses its cash. The three sections of the cash flow statement are cash flow from operations, cash flow from investments and cash flow from financing.

Cash Flow From Operations

The first section of the cash flow statement outlines sources and uses of cash flow from operations. Cash flow from operations refers to cash generated or used within the company's operations, such as investments in inventory and other short-term operational expenses. It also provides information about the company's sources of short-term funding from operations, such as accounts payable. This is perhaps the most important section of the cash flow statement to the investor since it shows what cash is being generated in operations as opposed to investments or financing.

Cash Flow From Investments

Cash flow from investments provides information about the inflows and outflows of company funds which are generated or used through investments. Examples include investments in real estate or marketable securities. Capital expenditures on company plant, property and equipment is also considered investment spending and is listed as a cash flow from investments.

Cash Flow From Financing

The last section of the cash flow statement is important to all stakeholders and investors in the company. It provides an overview of cash inflows and outflows from financing activities such as stock or bond issuance. When a company issues stock and bonds it creates an increase in cash flow from financing activities. When the company pays a dividend shareholders it is shown as a reduction in cash flow from financing activities.

Sources and Uses Of Cash

The balance sheet provides a list of values for the company's assets and liabilities, including a book value for the firm. However, the book value does not include certain intangible assets like brand and intellectual capital. It contains certain non-cash line items, such as accounts receivable or accounts payable. The income statement provides an overview of company earnings. It includes certain non-cash expenses, such as depreciation. These non-cash line items make it important for investors to know the real sources and uses of cash throughout the organization.

References

• SEC: Beginners' Guide to Financial Statements