Cash Flow Statement: Meaning, Objectives and Importance (2024)

Let us make an in-depth study of the meaning, objectives, features and importance of cash flow statement.

Meaning:

A Cash Flow Statement is a statement which is prepared by acquiring Cash from different sources and the application of the same for different payments throughout the year.

It is prepared from analysis of cash transactions, or it converts the financial transactions prepared under accrual basis to cash basis.

The information about the amount of resources provided by operational activities or net income after the adjustment of certain other charges can also be obtained from it. The changes in Cash—both at the beginning and at the end—can also be known with the help of this statement and that is why it is called Cash Flow Statement.

Objectives of Cash Flow Statement:

The primary objective of cash flow statement is to supply the necessary information relating to generation of cash to the users of financial statement. It also highlights the future or prospective cash positions i.e. cash or cash equivalent. The inflows and outflows of cash can be represented with the help of this statement.

However, the main objectives of cash flow statement are:

(a) Measurement of Cash:

Inflows of cash and outflows of cash can be measured annually which arise from operating activities, investing activities and financial activities.

(b) Generating inflow of Cash:

Timing and certainty of generating the inflow of cash can be known which directly helps the management to take financing decisions in future.

(c) Classification of activities:

All the activities are classified into operating activities, investing activities and financial activities which help a firm to analyse and interpret its various inflows and outflows of cash.

(d) Prediction of future:

A cash flow statement, no doubt, forecasts the future cash flows which helps the management to take various financing decisions since synchronisation of cash is possible.

(e) Assessing liquidity and solvency position:

Both the inflows and outflows of cash and cash equivalent can be known, and as such, liquidity and solvency position of a firm can also be maintained as timing and certainty of cash generation is known i.e. it helps to assess the ability of a firm to generate cash.

(f) Evaluation of future cash flows:

Whether the cash flow from operating activities are quite sufficient in future to meet the various payments e.g. payment of expense/debts/dividends/taxes.

(g) Supply necessary information to the users:

A cash flow statement supplies various information relating to inflows and outflows of cash to the users of accounting information in the following ways:

(i) To assess the ability of a firm to pay its obligations as soon as it becomes due;

(ii) To analyse and interpret the various transactions for future courses of action;

(iii) To see the cash generation ability of a firm;

(iv) To ascertain the cash and cash equivalent at the end of the period.

(h) Helps the management to ascertain cash planning:

No doubt, a cash flow statement helps the management to prepare its cash planning for the future and thereby avoid any unnecessary trouble.

Features of Cash Flow Statement:

The significant features are:

(i) Cash Flow Statement is very dynamic in character since it records the investment of cash from the beginning of the period to the end of the period.

(ii) It is a periodical statement as it covers a particular period.

(iii) This statement does not recognise matching principles.

(iv) This statement helps to calculate Cash from Operations/Cash Flows from Operational activities.

(v) It exhibits the changes of financial positions relating to operational activities, investing activities and financial activities respectively, by which an analyst can draw his conclusion.

Utility or Importance of Cash Flow Analysis:

Cash Flow Statement is particularly useful in short-term planning. In order to meet the various obligations, a firm needs sufficient amount of cash (e.g. payment for expenses, purchase of fixed assets, payments for dividend and taxes etc.).

It helps the financial manager to make a cash flow projection for immediate future taking the data, relating to cash from the past records. As such, it becomes easy for him to know the cash position which may either result in a surplus or a deficit one. However, Cash Flow Statement is an important financial tool for the management to make an estimate relating to cash for the near future.

(a) Helps to make Cash Forecast:

Cash Flow Statement, no doubt, helps the management to make a cash forecast for the near future. A projected Cash Flow Statement helps the management about the cash position which is the basis for all operations and, thus, the management sees light relating to cash position, viz. how much cash is needed for a specific purpose, sources of internal and external issues etc.

(b) Helps the Internal Management:

It helps the internal management to determine the financial policy to be adopted in future since it supplies information relating to funds, e.g. taking decision about the replacement of fixed assets or repayment of long-term liabilities etc.

(c) Reveal the Cash Position:

It is a significant pointer about the movement of cash, i.e. whether there is any increase in cash or decrease in cash and the reasons thereof which helps the management. Moreover, it explains the reasons for a small cash balance even though there is sufficient profit or vice versa.

Besides, the management can compare the original forecast with the actual one in order to understand the trend of movement of cash and the variation therefore.

(d) Reveals the result of Cash Planning:

How far and to what extent the cash planning becomes successful, is revealed by the analysis of Cash Flow Statement. The same is possible by making a comparison between the projected Cash Flow Statement/Cash Budget and the actual one, and the measures to be taken accordingly.