Accountancy · Ch 9 — Cash Flow Statement
Objectives of Cash Flow Statement
Objectives of Cash Flow Statement
A cash flow statement is not just a record of money coming in and going out. Its real purpose is to show where that cash came from and where it was used, sorted into three distinct kinds of business activities. This classification is what makes the statement useful for analysis.
The primary objective is to provide useful information about the cash inflows and outflows of an enterprise during a particular period, classified under three heads:
- Operating activities
- Investing activities
- Financing activities
This information helps users of financial statements — investors, creditors, management — assess two critical things:
- The ability of the enterprise to generate cash and cash equivalents. Can the business produce enough cash from its core operations to sustain itself?
- The needs of the enterprise to utilise those cash flows. Where is the cash being spent? Is it being reinvested in the business (investing activities) or used to repay loans and reward owners (financing activities)?
The ultimate goal is to enable users to evaluate the timing and certainty of future cash generation. A business that consistently generates positive cash flow from operations is generally considered healthier and more predictable than one that relies on selling assets or borrowing. …