How money flows

Cash flow statements throw light on the cash generating ability of a company.

Besides the balance-sheet and profit and loss account, the statement of cash flows is also a key disclosure forming part of a company’s annual report. It is a summary of receipts and payments disclosing the movement of cash during the period under consideration.

The CFS assumes significance as it reflects the liquidity and solvency position of a company. It throws light on the ability of the company to generate cash from its core operations, and where from it sources funds for expansion. Also, unlike the profit and loss account, which is based on the accrual method of accounting, the CFS discloses the actual movement of cash. Hence, it is also a useful tool to gauge a company’s ability to effectively manage cash. For example, while profit figures by itself may not help the company plan for repayment of debt and replacement of assets, an analysis of the cash flows will provide information on the funds available for the same.

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