Cash Flow Statement

Definition

A cash flow statement is a financial document that tracks the inflows and outflows of cash within a business over a specific period. It provides insight into how a company generates and uses cash from its operating, investing, and financing activities. Unlike the income statement, which records revenues and expenses, the cash flow statement focuses solely on cash transactions.

The cash flow statement is crucial because it:

Tracks Liquidity: Shows whether a company has enough cash to cover day-to-day operations and expenses.
Supports Decision-Making: Helps management plan investments, manage debt, and allocate resources effectively.
Provides Transparency: Offers clear visibility into how cash is generated and spent, essential for stakeholders and investors.
Predicts Financial Health: Highlights potential cash shortfalls or surpluses to prevent financial crises.
Builds Investor Confidence: Demonstrates a startup’s ability to manage cash effectively, a key consideration for potential investors.

There are two methods to prepare a cash flow statement:

Direct Method: Lists all cash transactions (e.g., receipts, payments) directly in the operating activities section.
Indirect Method: Starts with net income from the income statement, then adjusts for non-cash items and changes in working capital.

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How is a cash flow statement different from a profit and loss statement?

The profit and loss statement (income statement) tracks revenue and expenses, showing profitability, while the cash flow statement focuses on actual cash inflows and outflows to assess liquidity and cash management.

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Glossary

Definition

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