Cash flow is an important indicator for any business since it informs the public about how business cash is generated and allocated by the company. According to Murphy (2021), “the cash flow statement ( CFS) measures how well a company … generates cash to pay its debt obligations and fund its operating expenses” (para. 1). Along with the income statement and balance sheet, CFS is an essential part of the financial reports of a company.
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A manager could benefit from using a statement of cash flows on a routine basis because it allows for debt management and opportunities to invest in development and growth. For instance, using cash flow ratios can be applied as a method of evaluating the company’s financial health (Das, 2017). In turn, creditors can assess the organization’s ability to cover its operational expenses and debt (Das, 2017). Therefore, it can be stated that cash flow statements can help measure the overall performance of a company and align all processes in accordance with growth strategy.
At the same time, it is essential for financial statement readers to consider non-cash activities that may not appear within the CFS but rather in the notes. For example, purchasing an asset through issuing a bond, stock r a note payable, as well as converting preferred stock to the common one, are significant non-cash financial activities that can impact one’s decision to invest in a company (Das, 2017). Therefore, it is essential to understand the structure and meaning of CFS to interpret the financial and investment data correctly. Overall, measuring cash flow is a crucial process that allows for evaluating how a company generates cash to cover its expenses and pay off debt.
Das, S. (2017). Measuring the performance through cash flow ratios: A study on CMC. Journal of Commerce and Accounting Research, 6(4), 1-9.
Murphy, C. B. (2021). Understanding the cash flow statement. Investopedia.