Cash flow refers to the amount of cash moving in or out of a business. A cash flow statement, also known as the statement of cash flows, describes the cash flow during a given period covered by the statement. The cash flow statement is one of several core financial documents in any business enterprise.
Purpose of Statement
A cash flow statement is designed to give a more complete financial picture of a company. Rather than analyzing long-term financial prospects, as some other financial documents do, a cash flow statement focuses on a company's access to liquid assets in the short term. Essentially, a cash flow statement shows how much real money a company has.
Definition of Cash
A statement of cash flow doesn't necessarily only include cash. Certain business assets that operate in much the same manner as cash may be included as well. For instance, a cash flow statement may include bank deposits that the business has the right to demand immediately. It may also include any assets that are sufficiently liquid and anticipate minimal changes in value, such that a cash value can be placed on those instruments. The statement can also include expected or realized returns on investments.
The typical cash flow statement includes three basic areas: operating activities, investing activities and financing activities. The operating activities section describes the amount of incoming and outgoing cash from everyday business operations. The investing activities section includes the incoming cash from the sale of assets, as well as the outgoing cash used to invest in the same types of assets. The financing activities section describes cash received or distributed from lending and borrowing activities. Depending on the cash flow statement, the company may include dividends paid in either the operating or financing activities section. The names of these sections may vary, but the division into three parts is fairly standard for every cash flow statement. A fourth section may also describe miscellaneous pertinent information, such as exchange of other non-cash assets or payment of income taxes.
The financial health of a company may appear to be optimistic in the long term, but this doesn't necessarily guarantee that the company has sufficient assets to remain solvent in the short term. A cash flow statement can show whether a company has sufficient immediate assets to pay its bills, or pay dividends to shareholders. The statement may be used not only to assess a company's current cash held, but that company's prospects of cash holdings in the future.
- "Corporations, Other Limited Liability Entities and Partnerships"; Thomas Lee Hazen and Jerry W. Markham; 2008
- U.S. Legal: Cash Flow Law and Legal Definition
- FAO.org: Cash Flow Accounting
- U.S. Securities and Exchange Commission. "Exxon Mobile Corporation Form 10-K 2017." Accessed Mar. 17, 2020.
Erika Johansen is a lifelong writer with a Master of Fine Arts from the Iowa Writers' Workshop and editorial experience in scholastic publication. She has written articles for various websites.