CASH FLOW STATEMENT

Cash flow is an accounting term that refers to the amounts of cash being received and spent by a business during a defined period of time, sometimes tied to a specific project. Measurement of cash flow can be used to evaluate the state or performance of a business or project; to determine problems with liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash, even while profitable; to generate project rate of returns. The time of cash flows into and out of projects are used as inputs to financial models such as internal rate of return, and net present value; to examine income or growth of a business when it is believed that accrual accounting concepts do not represent economic realities. Alternately, cash flow can be used to validate the net income generated by accrual accounting.

A cash flow statement is a financial statement that shows a company's incoming and outgoing moneyduring a time period (often monthly or quarterly). The statement shows how changes in balance sheet and income accounts affected cash and cash equivalents, and breaks the analysis down according to operating, investing, and financing activities. As an analytical tool the statement of cash flows is useful in determining the short-term viabilityof a company, particularly its ability to pay bills.

People and groups interested in cash flow statements include accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses; potential lenders or creditors, who want a clear picture of a company's ability to repay; potential investors, who need to judge whether the company is financially sound; potential employees or contractors, who need to know whether the company will be able to afford compensation.

Operating activities of the company include the production, sales and delivery of the company's product as well as collecting payment from its customers. This could include purchasing raw materials, building inventory, advertising and shipping the product.

Items which are added back to the net income figure to arrive at cash flows from operations generally include depreciation (loss of tangible asset value over time); deferred tax; amortization (loss of intangible asset value over time); any gains or losses associated with an asset sale (unrealized gains/losses are also added back from the income statement)

Investing activities focus on the purchase of the long-term assets a company needs in order to make and sell its products, and the selling of any long-term assets that are no longer needed by the company.

Items under investing activities includecapital expenditures, which include purchases (and sales) of property, plant and equipment and investments.

Financing activities include the inflow of cash from investors such as banks and shareholders, as well as the outflow of cash to shareholders as dividends as the company generates income. Other activities which impact the long-term liabilities and equity of the company are also listed in the financing activities section of the cash flow statement.

Items under the financing activities section include dividends paid; sale or repurchase of the company'sstock; net borrowings.

A cash flow statement can be created by two methods: direct and inderect. The direct method includes major classes of gross cash receipts and payments. This method starts with revenues and expenses, while also including Current Assets as well as Current Liabilities.