How Well Do You Understand Cash Flow Statements?

Summary Title: Understanding Cash Flow Statements

• Cash flow statement is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks down the analysis to operating, investing and financing activities.
• People and groups interested in cash flow statements include investors, creditors, management, and analysts.
• The cash flow statement is an important indicator of a company's financial health, as it reveals the quality of a company's earnings and the firm's capacity to pay interest and dividends.
• The cash flow statement differs from the balance sheet and income statement in that it excludes non-cash transactions required by accrual basis accounting.
• The cash flow statement is intended to show the sources of a company's cash flow and how it was used over a specific time period.
• Cash basis financial statements were common before accrual basis financial statements.
• The cash flow statement was developed in 1863 by the Dowlais Iron Company to explain the lack of funds for investment despite making a profit.
• In 1987, FASB Statement No. 95 (FAS 95) mandated that firms provide cash flow statements.
• US GAAP and IAS 7 rules for cash flow statements are similar, but some differences exist.
• Operating activities include production, sales, and delivery of the company's product, as well as collecting payment from customers.
• Investing activities include acquiring and disposing of long-term assets and investments.
• Financing activities include inflows and outflows of cash between investors and the company.