Insitution
Cash flow statement complements the balance sheet as well as the profit and loss account. The balance sheet reflects the company's financial position at a particular time (e.g. the end of the accounting period), and cash flow statement explains changes that have occurred with one of the components of the financial statements - in cash - from one balance sheet date to another (Dambolena & Shulman, 1988).
Balance is one of the main elements of the financial and management accounts. Depending on the destination and type of company, balance sheet structure can vary significantly (Spurga, 2004). However, its structure always retains some common features. The balance sheet is always composed of two main parts: assets and sources of their financing (liabilities); while total assets always equal total liabilities. Sources of funding can be divided into two groups: own assets and liabilities. Assets and liabilities are in turn divided into current (current) and long-term (non-current) (Spurga, 2004).
Profit and loss account reflects the results of operations for the period; and this activity is the main factor that changes the state money, as reflected in the statement of cash flows. The movements of the enterprise funds is useful in that it provides the users of the financial reporting framework to assess the company's ability to attract and use the cash and cash equivalents. Cash flow statement, in addition, contains information that is useful in assessing the company's financial flexibility (Dambolena & Shulman, 1988). Financial flexibility is a firm's ability to generate significant amounts of cash in order to timely respond to unexpected needs and opportunities. Information about the cash flows for prior periods, particularly the cash flow from operations helps to assess financial flexibility (Damodaran, 2011). Evaluation of the ability of the company to survive, such as the sudden fall in demand may include a cash flow analysis of the main activities for the previous periods. The greater cash flows, the higher would be the firm's ability to withstand adverse changes in economic conditions.
Cash flow consists of three main sections:
Operating activities - Cash flows arising as a rule, the main income-generating activity of the company.
Investment activity - resource costs intended to generate future income.
Financial activities - cash flows associated with the formation of the company's capital (Jury, 2012).
The cash flow statement must contain the corresponding information for the reporting period, broken down into flows from operating, investing or financing activities. The company provides information of cash flows from operating, investing or financing activities in a manner that best suits the nature of its activities. Classification by activity provides the information that allows users to assess the impact of those activities on the financial position of the company and the size of its cash and cash equivalents (Jury, 2012). This information can also be used to assess the relationship between these activities.
The amount of cash flows from operating activities is a key indicator of how businesses provide cash flow sufficient to maintain the operating capability of the enterprise, repayment of loans, payment of dividends and the implementation of other investments without recourse to external sources of financing. Information about the specific components of cash flow from operating activities for the previous periods, in conjunction with other information, will be useful in predicting future cash flows from operating activities.
References
Dambolena, I., & Shulman, J. (1988). A Primary Rule for Detecting Bankruptcy: Watch the Cash. Financial Analysts Journal, 44(5), 74-78. http://dx.doi.org/10.2469/faj.v44.n5.74
Damodaran, A. (2011). Applied corporate finance. Hoboken, NJ: John Wiley & Sons.
Jury, T. (2012). Cash flow analysis and forecasting. West Sussex [England]: John Wiley & Sons.
Spurga, R. (2004). Balance sheet basics. New York: Portfolio.
