For example, increase in capital expenditure and development costs may indicate a higher increase in future revenue streams whereas a trend of excessive investment in short term investments may suggest lack of viable long term investment opportunities. By summarizing key changes in financial position during a period, cash flow statement serves to highlight priorities of management. in NPV analysis) on which to base their economic decisions. It also enables analysts to use the information about historic cash flows to form projections of future cash flows of an entity (e.g. Statement of cash flows provides important insights about the liquidity and solvency of a company which are vital for survival and growth of any organization. in respect of non cash expenses) in order to present only the movement in cash inflows and outflows during a period.Īll cash flows are classified under operating, investing and financing activities as discussed below. overdraft) as opposed to a bank overdraft facility specifically negotiated for financing a shortfall in funds (in which case the related cash flows will be classified under financing activities).Īs income statement and balance sheet are prepared under the accruals basis of accounting, it is necessary to adjust the amounts extracted from these financial statements (e.g.
where bank account is allowed to float between a positive and negative balance (i.e. Bank overdrafts in cases where they comprise an integral element of the organization’s treasury management (e.g.Short term investments that are highly liquid and involve very low risk of change in value (therefore usually excludes investments in equity instruments).Statement of Cash Flows presents the movement in cash and cash equivalents over the period.Ĭash and cash equivalents generally consist of the following:
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