The Cash Flow Statement
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THE CASH FLOW STATEMENT
The cashflow statement uses the information from the accounting records such as the income statement and balance sheet and shows the money flowing in and out of a business. In simpler terms, it shows where the cash has come from and where the cash has gone to. Furthermore, the cashflow statement explains the reasons for the changes in the cash and bank balances between the periods. And focuses on the liquidity of the business and clarifies in some cases why the cash and bank balances may have fallen despite profits being earned. It is important to note that profit is not the same as cash flow and sometimes when good profits are made a business can still experience cash flow difficulties. Similarly, a business can be reasonably liquid despite making only small profits. This can be caused due to a variety of factors. A few of these factors are large drawings being taken, large values of equipment being purchased, or generous credit terms given to debtors. The cashflow statement is very important such to an extent that the accounting standards require all but small businesses to include the cashflow statement alongside the income statement and balance sheet.
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