Cash Flow Statement: Importance and Classification

In this article, I would like to discuss the importance and the classification of a cash flow statement. The cash flow statement is to provide imperative information to investors and creditors to assess the following of your entity:

  1. The ability for the entity to generate future cash flow.

  2. The ability to meet obligations.

  3. The ability to identify as to the reasons for the difference between net income and net cash flow from operating activities.

  4. The cash and non-cash investing and financing transactions during the period.

It can answer some questions as to:

  • Why did cash decrease when the entity reported a net income for the accounting period?

  • How much the entity paid for PP&E?

  • How much did the entity borrow during the accounting period?

The three classifications of a cash flow statement are:

  1. Operating activities

  2. Investing activities

  3. Financial activities

The statement of cash flow comes from the income statement and the balance sheet. It is extremely important, as a business owner, to be able to locate this information and to classify them accordingly. If not, your cash flow statement will not be accurate.

At A & C Bookkeeping Services, as part of our work for you, we will generate monthly cash flow statements with commentary of each item. Please contact us for all of your accounting needs.

Disclaimer: This blog is for information only purposes only and is not intended to provide investing, accounting, tax or legal advice and should not be relied upon

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