What is a cash flow statement and how do you use it

A cash flow statement or the statement of cash flows is one of the financial statements that many companies use to inform the public about their business, it can also be used for internal purposes in small businesses. The statement of cash flows is used to report the company's cash receipts, cash payments, and the net change in the company's cash resulting from the company's operating, investing, and financing activities for the period it is prepared for. Some companies prepare a statement of cash flows once a year, while others prepares them once a quarter. The statement of cash flows is used to reconcile the company's beginning cash balance to its ending cash balance.

One of the statement of cash flows purposes is to help investors, creditors, and any other interested party understand what is happening to the company's cash throughout the year. Every cash transaction is accounted for on the statement of cash flows and the other financial statements are used to help prepare the statement of cash flows. The statement of cash flows also provides answers to the following questions.

- Where did the cash from during the reporting period?
- What was the cash used for during the reporting period?
- What was the change in the cash balance during the reporting period?
- How did cash increase when there was a net loss for the period?
- How were the proceeds of the bond used?
- How was the expansion in the plant and equipment financed?
- Why were dividends not increased?
- Is cash flow greater or less than net income?
- How much money was borrowed during the year?
- How was the retirement of debt accomplished?

The statement of cash flows is broken down into three different types of activities: financing, operating, and investing. Operating activities include the effects cash has on transactions that create revenues and expenses, which makes them a part of net income. Investing activities include obtaining and getting rid of investments and productive long-term assets, as well as lending money and collecting money owed on loans. Financing activities include making money from issuing debt and repaying the amounts borrowed and from getting money from stockholders (selling stock) and providing them with a return on their investment (paying dividends).

The statement of cash flows also helps investors, credits, and other interested parties asses the following aspects of a company's financial position.
- Ability to generate future cash flows - by examining relationships between items in the statement people can make predictions of the amounts and uncertainty of future cash flows
- Ability to pay dividends and meet obligations - if there is not enough cash companies will not be able to pay their employees, debts, or dividends to its stockholders
- Reasons for the difference between net income and net cash used by operating activities - can show the success or failure of a business
- The cash investing and financing transactions during the period - can understand why assets and liabilities changed during the period.

There are two different ways to prepare the statement of cash flows, the direct method and the indirect method. Both methods however get their information from the same sources. Unlike other financial statements the statement of cash flows does not use an adjusted trial balance for preparation it is instead prepared from the comparative balance sheets, current income statement, and any other additional information that is relevant. Most companies actually tend to use the indirect method because it is easier to prepare and it focuses on the differences between net income and net cash flow from operating activities, which is important for investors and creditors.