Financial statements are crucial for any enterprise as they reflect the actual state of a company’s budget. They are used by both business owners and investors to evaluate the actual efficiency of operations. According to Kennon (2018), the primary objective is to understand and calculate ratios, which allow determining the profitability of an enterprise. One of the approaches for creating and examining such statements is the balance sheet.
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Cash flow is a subtype of a financial statement, which reflects the balance of a company’s financials. Akdeniz (2015) states that cash flow consists of “operating, investing, and financing activities” (p. 10). In a way, this report is similar to the income statement as both provide insight into performance measures and profitability.
The specific aspect, which distinguished cash flow from other financial statements, is that it does not reflect noncash operations. For instance, depreciation would not be included in such report. Additionally, it is especially crucial for small businesses to calculate their cash flow on a quarterly basis (“Cash flow statement,” n.d.). It is because adequate management of cash is necessary for an establishment to be able to pay the bills as required.
This type of financial statements is helpful in identifying a company’s ability to pay for its activities on a daily basis. It should be applied to determine the economic component in the short-term perspective. Inflows, outflows, and their management are the primary objectives for cash flow calculations (“Cash flow statement,” n.d.). It should be noted that a company, that is considered profitable by accounting standards would present adverse results in its cash flow calculations. Thus, it is essential to understand the value of a cash flow statement and ensure that a company calculates the ratios on a regular basis.
Akdeniz, C. (2015). Financial statements explained. Bad Bodendorf, Germany: First Publishing.
Cash flow statement. (n.d.). Web.
Kennon, J. (2018). How to read and understand financial statements. The Balance. Web.