What is Cash Flows ?

It is this compilation and integration of facts that draw savvy managers and investors to utilize this often overlooked financial statement. It is important to remember that all the figures in a cash flow statement can be found somewhere in the income statement, balance sheet, statement of shareholders equity, or any one of the financial statement notes provided.

If you looked at an income statement prepared using the accrual basis of accounting you could see a figure for reported revenues, but you would not know if they have been collected yet. Similarly, the expenses reported on the income statement might or might not have been paid.

Alternatively, you could review the balance sheet changes to determine the facts, but the cash flow statement has already integrated all that information.

There are many ways you can utilize the information a cash flow statement presents. For example, if an organization's cash generated from operations is consistently above its net income or earnings they are referred to as 'high quality.'

In circumstances where the opposite is true then the organization's earnings have a 'red flag' raised against them. This informs anyone looking into the organization that they need to investigate further why its reported earnings are not turning into cash.

Where an organization consistently generates cash in excess of what it needs on a day-to-day basis, it has the ability to offer its investors a higher dividend or buy back some of its own shares. Such an organization is considered to have 'good stockholder value' by investors.

This is not the only option and they may choose to use this excess cash to reduce debt or acquire another organization. In the case of nonprofit organizations, a positive cash flow allows them to expand their operations and offer additional or improved services. If you need a basic financial accounting principles pdf then download our free eBook now.

It would be possible for you to create a report that listed all of the individual cash transactions as shown in Gary's cash account for January and February. But it does not really add to what you can already see on the bank statement because it doesn't show inflows and outflows in any meaningful way.

Grouping cash payments together and showing a total movement in cash over a particular period is much more useful. The report below shows Gary's Garden Furniture cash receipts and disbursements for July.

Showing the flow of cash into and out of the organization in this way provides a summary of the cash account. Unfortunately, it does not show net income or make any attempt to explain the difference between any net income and net cash flow.

As well as these shortcomings, it is difficult to analyze these figures in any meaningful way. Consequently, published accounts always use what is known as the indirect method of presentation.

This is the format that appears in all published financial reports of public companies and is the same format as the report produced by most accounting software. If you need a basic financial accounting principles pdf then download our free eBook now.

Cash flow is simply the flow of cash through the organization over time. In the case of businesses that are run for profit, cash is paid out in return for the labor and materials that are used to provide goods and services that can be sold. The revenues received provide cash that can then be used to finance further production and sales as well as increasing the organization's economic value.

As a manager, you need to understand how cash flows are generated and what factors impact those flows. This knowledge is an integral part of making financial decisions that increase a firm's economic value or the capabilities of a nonprofit organization.

The management of cash flow is one part of a larger management responsibility known as the management of working capital, which refers to the operating liquidity available to an organization.

An organization can have assets and profitability, but find itself short of liquidity if its assets cannot readily be converted into cash.

Working capital is required to ensure that the organization is able to continue its operations and that it has sufficient funds to satisfy operational expenses and any maturing short-term debt. The management of working capital involves managing the four following aspects of an organization's operations:

Cash flow is simply the flow of cash through the organization over time.

Working capital is required to ensure that the organization is able to continue its day-to-day operations.

The management of working capital involves actively controlling inventories, accounts receivable, accounts payable, and cash.

The effective management of working capital can increase profitability in the private sector and reduce the amount of capital required by nonprofit organizations.

This statement begins with net income and adjusts for changes in account balances that affect available cash. It is slightly more difficult to understand initially but has far more potential for analysis.

When you look at the example below of Gary's Garden Furniture you will see that the first entry is net income. This figure has been taken from the Income Statement for the period. The idea is that net income is presumed to be equal to net cash flow except for the adjustments that make up the details of this statement.

Operations is the process of running the organization with all of the related cash flows such as buying and selling goods, services, manufacturing, and paying employees. The entries under this title effectively convert the items reported on the income statement from the accrual basis of accounting to cash.

This reports the purchase and sale of long-term investments and property, plant, and equipment.