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What is Cash Flow Statement?

For a business to be successful, it must have sufficient cash at all times for its expenses. Without it, the company’s operations could come to a standstill.

So how do we ascertain, whether the company has enough cash or will have enough in the future?

One way is to study the cash flow of a company with the help of the cash flow statement.

What is a cash flow statement?

A cash flow statement is a financial statement that includes cash received by the company (inflow) as well as the cash spent by the company (outflow).

It provides information on all activities of a business, over a period, in which the flow of funds i.e. cash, was involved.

There are three parts in a cash flow statement -

  1. Cashflow from operating activities - includes cash flow from all transactions in normal business activities.
  2. Cash flow from investing activities - includes all cash flow from the company's investments, disinvestments, and the resulting profits/losses
  3. Cash flow from financing activities - includes all cash flow from the company's efforts to raise capital via debt or equity as well as any cash returned to shareholders.

The sum of all these activities results in the net cash flow. When this number is positive, it means more cash is coming into the company than going out and vice versa.

A negative net cash flow number need not be a bad thing. It could mean the company is paying off debt or has paid a special one-time dividend to shareholders.

Note that the cash flow statement must be used along with the balance sheet and income statement in order to properly analyse a business.

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