The Cash Flow Statement

The cash flow statement

The cash flow statement summarizes the flow of cash in and out of the firm over a period of time. In this sense, it is really an analysis of the cash account. The cash flow statement is important for a number of reasons. First, by focusing on cash flows, it explains the nature of the financial events which have affected the cash inventory. Thus, if a firm had a balance of Lx at the beginning of the accounting period and Ly at the end of the accounting period, the cash flow statement will explain the reason for the difference. Second, the cash flow statement is important for financial planning purposes. As we shall see in Part 5, budgeted cash flow statements are a crucial element in the process of budgetary planning, indicating cash surpluses and shortfalls resulting from budget plans. These surpluses and shortfalls are expressed sequentially over the planning period and require management to deal with the forecasted cash surplus or deficit, the former involving a short-term investment of surplus cash, the latter a short-term borrowing arrangement. Third, the cash flow statement brings into sharp contrast the enterprise's earning capacity with its spending activity. Accounting conventions restrict the income statement to matching periodic revenues with the cost of earning those revenues. The cash flow statement is not restricted in this way: hence, it provides an extended view of the financial inflows and outflows by including both capital and revenue flows. Thus, borrowings and capital injections, as well as proceeds from the realization of assets are incorporated with the cash generated from sales to give a more complete picture of financial inflows: repayments of loans, capital expenditure, dividends and taxation are incorporated with revenue expenses to give a more complete picture of financial outflows.

Our purpose in this webpage is to deal with the historical analysis of cash flows.

Form and content of the cash flow statement

The objective of a cash flow statement is to reconcile the opening balance with the closing balance of cash at the end of an accounting period. Hence, it begins with the balance at the beginning of the year.

An important distinction between an income statement and a cash flow statement is that the former includes adjustments in respect of expenses accrued in the calculation of periodic income, whereas the latter excludes such adjustments. The largest item of difference between them is the allocation of fixed asset costs as depreciation, and it is normal to adjust accounting income in this respect to arrive at a cash flow statement of operating revenues. Other differences between the income statement and cash flow statement procedures are reflected in changes in balance sheet items. These would include changes in balances of trade debtors and trade creditors stemming from credit as distinct from cash trading.


Interested in Income Measurement

Read on: Ssap 10: Statements of Source and Application of Funds

SSAP 10: Statements of Source and Application of Funds

The Accounting Standards Committee recognized the importance of the funds flow statement in SSAP 10 'Statements of Source and Application of Funds' published in January 2006. According to SSAP 10,

'A Funds Statement should show the sources from which funds have flowed into the company and the way in which they have been used. It should show clearly the funds generated or absorbed by the operations of the business and the manner in which any resulting surplus of liquid assets has been applied or any deficit of such assets has... see: Ssap 10: Statements of Source and Application of Funds