Can someone explain to me the purposes and uses of the statement of cash flows and discuss the three activities that the statement of cash flows depicts?

 

The statement of cash flows is a financial statement that summarizes the amount of cash and cash equivalents entering and exiting an entity. The cash flow statement (CFS) calculates how well a business handles its cash position, which means how well the business produces cash to pay its debt obligations and cover its operating costs. The cash flow statement complements the balance sheet and the statement of profits and has been a compulsory component of the financial reporting of a company since 1987. For investors, the statement of cash flows is very significant because it indicates how much real cash a business has generated. In contrast, the income statement also contains non-cash sales or expenditures, which are exempt from the statement of cash flows. Nevertheless, the purposes and uses of the statement of cash flows are as follows;

• The primary purpose of the statement of cash flows is to provide information about cash receipts, cash payments, and the net change in cash resulting from the operating, investing, and financing activities of a company during the period. 
• The cash flow statement examines how well a business treats its cash position, which means how well the business raises cash to meet its debt obligations and cover its operating costs.
• The cash flow statement complements the balance sheet and the statement of profits and has been a compulsory component of the financial reporting of a company since 1987.
• The  statement of cash flows helps investors to understand how the activities of a business work, where its capital comes from and how money is invested. The  statement of cash flows is crucial because it allows investors to determine if a business is on a stable financial footing.  On the other hand, creditors may use the  statement of cash flows to assess how much cash (referred to as liquidity) is sufficient for the firm to cover its operating costs and pay off its debts.

A cash flow statement, also known as a statement of cash flows or a statement of funds flow, is a financial statement in financial accounting that demonstrates how adjustments in balance sheet accounts and revenue impact cash and cash equivalents, and breaks the analysis down to operating, spending, and funding activities. The following are the activities that the statement of cash flows depicts;

1. Cash from operating activities.
2. Cash from investing activities
3. Cash from financing activities

Cash from operating activities

Both sources and uses of cash from business activities are covered by the operational activities of the statement of cash flows. In other words, it represents how much cash is generated from the goods or services of a business. Generally, changes made in cash, accounts receivable, depreciation, inventory, and accounts payable are reflected in cash from operations.

These operating activities might include: Receipts from sales of goods and services, Interest payments, Income tax payments, Payments made to suppliers of goods and services used in production, Salary and wage payments to employees, Rent payments, Any other type of operating expenses.

Cash from investing activities

Any sources and uses of cash from the investments of a business include investing activities. This category covers the purchase or selling of an asset, loans made to suppliers or obtained from clients, or other payments related to a merger or acquisition. In short, improvements in services, properties, or investments are linked to investing cash.

Cash From Financing Activities

Cash from financing activities encompasses the sources of cash generated by investors or banks, as well as the use of cash paid to shareholders. This category covers the payment of dividends, compensation for stock repurchases, and repayment of debt principal (loans).