Concept Of Cash Flow Statement And Its Objectives

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Concept Of Cash Flow Statement

Every big and small firms performs cash transactions. Cash transaction refers to cash inflows and outflows.Cash inflows and outflows help to review success, failure of a firm and its ability to meet maturing debts. Such review and evaluation are possible if the statement of cash flow is prepared.Accounting standard Board(ASB) at international level in 1996 suggested every firm to publish the statement of cash flow along with the final accounts. Since then the statement of cash flow is getting more recognition than funds flow statement.

The statement that shows cash inflows and outflows of a firm for a specified period is called the cash flow statement. Cash flow statement demonstrates where the cash has come during the period and what the firm has done with the available cash. Therefore, cash flow statement shows a picture of cash movement occurred in and out from a firm during a year in a summarized form. Cash flow statement gives a picture of sources and applications of cash of a firm for a year.

The cash flow statement is not a cash book because it demonstrates inflows and outflows of cash and near to cash items. Cash and near to cash cover entire items of current assets and current liabilities. The cash flow statement reports increase and decrease in cash by listing in meaningful categories in terms of operating,investing and financing activities.

Objectives Of Cash Flow Statement

1. To provide information about the cash inflows and cash outflows from operating, financing and investing activities of the firm.

2. To show the impact of the operating, financing and investing activities on cash resources.

3. To tell how much cash came in during the period, how much cash went out and what the net cash flow was during the period.

4. To explain the causes for changes in cash balance.


  1. Cash is the only measure which cannot be manipulates. Earnings can be manipulated when using different accounting methods. For that reason the cash flow statement is a very important tool to understand or when building a financial model with the company's cash flows in the future.

  2. A cash flow statement provides information about the changes in cash and cash equivalents of a business by classifying cash flows into operating, investing and financing activities. It is a key report to be prepared for each accounting period for which financial statements are presented by an enterprise.

    Objectives of preparing Cash Flow Statement:

    - Cash flow statement shows inflow and outflow of cash and cash equivalents from various activities of a company during a specific period under the main heads i.e., operating activities, investing activities and financing activities.

    - Information through the Cash Flow statement is useful in assessing the ability of any enterprise to generate cash and cash equivalents and the needs of the enterprise to utilize those cash flows.

    - Taking economic decisions requires an evaluation of the ability of an enterprise to generate cash and cash equivalents, which is provided by the cash flow statement

    Source: Leading Los Angeles Accounting Firms