The statement of cash flow is an integral part of the financial statements prepared by businesses all over the world. The need for this statement is because of the deficiency in the accrual basis of preparing and presenting financial statements. This is used to produce profit in the statement of comprehensive income; and the financial position of a business from a statement of financial position.
At times, a business may claim profit but do not have cash for daily operating activities. Therefore, a statement of cash flow can clarify why it happens. To begin, let’s define a statement of cash flow, then gives a detailed explanation of its importance.
Definition of statement of cash flow
A statement of cash flows is a financial statement that reveals how cash was dispensed by a business organization. It reveals how the cash and cash equivalents balance is attained.
What you need to know
A statement of cash flow is a financial statement. It is prepared at the end of every year. Some businesses may prepare it monthly, quarterly or bi-annually.
The bottom line of this statement is the cash and cash equivalent balance. You can find these balances in the statement of financial position.
A business can dispense cash in three ways: operation use, investing uses and financial uses. For operational use, cash is dispensed to meet day-to-day business activities. In investing, the firm may acquire or disposed of non-current assets and any other investments. For finance use, a company may pay dividends to shareholders or issue new shares The statement of cash flow was previously known as fund flow statement.
A consolidated and separate statement of cash flow is prepared by holding companies. Below is such a statement, a screenshot, presented by Dangote cement, the holding company for Dangote Plc.
Importance of the statement
Here are some of the needs for cash flow statement:
A statement of cash flow reconciled the weakness of the accrual basis of accounting. This is so as cash flow statement is prepared on the cash basis of accounting.
This statement is basically required by banks when requesting for a loan. It helps the bank or any other creditor to know if the loan can be repaid easily from the business financial resources.
Potential investors used the statement of cash flow to know the possibility of payment of dividends by the company he or she wants to invest it’s money resources.
The statement aid employees to know the possibility of the firm to pay its salaries. It can be used to bargain for an increase in salary.
Business owners, directors, and managers can use the statement to measure how efficient it was able to manage the financial resources of the firm.
To conclude, the omission of this statement is totally not possible. It is required by major stakeholders of organizations.