Cash flow Statement


Businesses often make a profit but still go into liquidation because they do not have sufficient cash to cover the costs. The income statement is helpful in displaying the potential profits that a business can made but this is often argued as insufficient, because it does not give an accurate measure of the activities of a business. The statement of cash flow gives a summary of the cash and equivalents inflows and outflows over a period of time.

The cash flow statement is at times preferred over the income statement because profits in the income statement can easily be manipulated whilst it is more difficult to manipulate the cash fl0w statement.

Cash flow statement

A cash flow statement links the income statement and Position statement together and shows the impact of organisation activities in cash terms. It will show the sources of cash, for example from operating activities, grants received, sale of assets, it will also show where the cash has gone, for example capital purchases, loan repayments etc. The overall effect of these cash receipts and payments is reflected by the increase or decrease in the bank balances during the year. This statement also helps management assess the liquidity, solvency and financial adaptability of the organisation.

The published cash flow statement is an historical statement, due to the criticality attached to cash management it is recommended that all organisations prepare a forecast cash statement on a rolling twelve-month basis (at minimum), this will prove to be an invaluable management tool. Note that a cash flow statement does not show the profitability of a company, only an income statement shows how much profit a business is making.

Users of cash flow statements
Some of the usefulness of a cash flow statement include:

Shareholders: May want to know whether the business has sufficient cash to continue running without facing liquidation issues.

Employees: May want to assess the stability of a business, whether the business’s activies is likely to affect job stability.

The IAS 7 requires the statement of cash flow to consist of:

  • Cash- Cash on hand and demand deposits
  • Cash Flows- Short-term and highly liquid investments that are easily converted to a known amounts of cash
  • Cash Equivalents
  • Operating Activities
  • Investing Activities
  • Financing Activities