What Is a Statement of Cash Flows?
Learn about the statement of cash flows, its components, and its importance in financial reporting.
The Statement of Cash Flows is a financial report that details the cash generated and used by a company in a specific period, categorized into three main activities: operating, investing, and financing.
Purpose
- It reveals the company's ability to generate cash, crucial for maintaining operations, repaying debts, and returning value to shareholders.
- It provides an understanding of the company’s financial flexibility and its capability to respond to financial opportunities or challenges.
- Unlike the income statement, the Statement of Cash Flows does not include non-cash items, offering a clear view of a company's cash position.
Components of the Statement of Cash Flows
Operating Activities
This section reflects the cash flows from the company's core business operations, such as cash received from customers and cash paid to suppliers and employees. It's a measure of the company's ability to generate cash from its regular business activities.
- Example: Cash received from sales of goods and services.
Investing Activities
Investing activities include transactions involving the purchase and sale of long-term assets like property, plant, and equipment, as well as investment securities.
- Example: Cash paid for purchasing a new manufacturing plant or cash received from the sale of an old office building.
Financing Activities
Financing activities cover cash flows related to borrowing and repaying bank loans, issuing and buying back stocks, and paying dividends.
- Example: Cash received from issuing new shares or cash paid as dividends to shareholders.
Importance of the Statement of Cash Flows
Understanding Liquidity
The statement helps in assessing the company's liquidity by monitoring the cash generated from operations, which is essential for meeting short-term obligations and for strategic planning.
Evaluating Financial Flexibility
By analyzing cash flows from investing and financing activities, stakeholders can gauge the company's financial flexibility and its capacity to adapt to changes and opportunities.
Complementing Other Financial Statements
When used alongside the income statement and balance sheet, the Statement of Cash Flows provides a comprehensive view of a company’s financial health, complementing accrual-based accounting measures with a focus on real cash movements.
Example of a Statement of Cash Flows
Below is an example of a statement of cash flows for a hypothetical company, XYZ Corporation, for the year ended December 31, 2024:
For the fiscal year ended March 31, 2024
| Categories | Amount (₹) |
|---|---|
| Cash Flows from Operating Activities | |
| Net Income | 50,000 |
| Adjustments to reconcile net income: | |
| Depreciation | 10,000 |
| Increase in Accounts Receivable | (5,000) |
| Increase in Inventory | (3,000) |
| Increase in Accounts Payable | 4,000 |
| Net Cash Provided by Operating Activities | 56,000 |
| Cash Flows from Investing Activities | |
| Capital Expenditures | (20,000) |
| Proceeds from Sale of Equipment | 7,000 |
| Net Cash Used in Investing Activities | (13,000) |
| Cash Flows from Financing Activities | |
| Proceeds from Issuance of Stock | 15,000 |
| Repayment of Long-term Debt | (10,000) |
| Dividends Paid | (8,000) |
| Net Cash Provided by (Used in) Financing Activities | (3,000) |
| Net Increase (Decrease) in Cash | 40,000 |
| Cash at Beginning of Period | 10,000 |
| Cash at End of Period | 50,000 |
This example illustrates how the Statement of Cash Flows categorizes the cash inflows and outflows into operating, investing, and financing activities, thereby helping stakeholders understand how the business generates and uses its cash over time.
Conclusion
The Statement of Changes in Equity is an insightful financial report that sheds light on the dynamics of a company's equity over a period. It offers a comprehensive view of how profit retention, dividend policies, and equity financing contribute to the company’s equity position. For stakeholders in companies like HDFC Bank, it forms a critical part of the financial statements, alongside the balance sheet, income statement, and cash flow statement, providing a deeper understanding of the company's financial management and strategy.