Uses of Cash Flow Statement
The statement of cash flows is primarily designed to provide relevant information about how an enterprise’s cash has been received and expended during a given time period. Information from financial statements will help users assess the amounts, timing, and uncertainty of prospective cash flows for the enterprise.
Cash flow statements serve as a useful tool for analyzing an enterprise’s liquidity, financial flexibility, profitability, and risk. As well, they provide feedback about previous assessments of those factors. Analysts, investors, creditors, managers, and others will find the information in the statement of cash flows helpful in assessing:
- A firm’s cash position can be based on the statement of cash flows.
- By preparing a projected cash flow statement, a company is able to plan and coordinate its financial operations in order to know its future cash position.
- Comparing historical and projected cash flow statements will allow the firm to identify any variations and deficiencies in performance so that immediate and effective actions can be taken.
- Over time, comparing intra-firm and inter-firm cash flow statements reveals whether the firm’s liquidity is improving or deteriorating.
- Using a cash flow statement, one can plan for repayment of loans, replacement of fixed assets, and other long term cash planning activities.
- In short-term financial analysis, cash flow analysis is more appropriate than funds flow analysis, as in a very short period, it is the cash, which is more relevant, rather than the working capital, for forecasting the ability of a firm to meet its immediate obligations.
- As there is no standard format for the funds flow statement, the cash flow statement prepared according to AS-3 is better for comparison than the funds flow statement.
- An operating, investing, and financing cash flow statement summarizes all related activities.