The term cash flows refer to the receipts and payment of cash. A financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents is known as a statement of cash flow. Similar to an income statement, a cash flow statement records a company’s performance over a period of time. Consistently, companies will disclose the cash arising are generally required to prepare a statement of cash flow in their annual reports because it contains vital information for lenders and investors who primarily make informed and economic decisions about the companies. Generally during a company’s accounting period their cash flow is categorized and divided into three sections which are: cash flow from operations, financing and investing. The primary reasons these transactions are catergorized and divided is so investors will understand what the transactions are related to and how each section paints a vivid picture of how the company is doing from both a cash standpoint and overall health. The statement of cash flow is very important for companies that are required to prepare and present their financial statement in accordance to with international accounting standards and international financial reporting standards.
Cash flows from operating activities represent the cash collected from the primary revenue generating activities and will include all transactions from the operations of business. Operating activities are short term activities which only affect the current accounting period and are calculated by adjusting net income from the changes in current asset and liability accounts.
From investing activities, the cash flow consist of how much cash inflows and outflows from sale and purchases of long term assets. Another way to view this section is think of the company as investing in themselves. Investing cash flows are calculated by adding up the changes in long term asset accounts which are generally expected to last more...
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