A statement of cash flows shows how much cash is moving in and out of a business over a particular period of time. Understanding the cash availability to pay debts and purchase materials is a very critical aspect of every business.

The statement of cash flows is one of three core financial statements (balance sheet and profit and loss report, being the other two) that are used to evaluate a business’s financial performance, position, and value.

A statement of cash flows consists of three main sections relating to different areas of a business:

  • Cash flow from operations – this is the movement of cash from the main activities of the business (e.g. receipts from sales and payments to suppliers and employees)
  • Cash flow from financing – this is the measurement of cash used in financial transactions (e.g. income from dividends, interest, and other investments and expenditure like loans, dividends paid, etc.)
  • Cash flow from investments – this is the measurement of cash used in investment activities (e.g. purchases and sales of assets, such as property, plant, and equipment, etc.)

The statement of cash flows can be simple or very intricate, depending on the size of the business and the variety and complexity of its activities. The critical and most important part is the net cash flow, which appears at the bottom part of the statement. This figure can be compared to previous periods and indicates the health status of the business.

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