the concept behind the cash flow statements?



the concept behind the cash flow statements?

In: Economics

An income statement contains a record of revenues, incomes and expenditures. Not all expenditures are cash based (like depreciation). A balance sheet also contains items some in cash form but most in non-cash form (like property, receivables, payables etc). When you convert one form of asset to another, say buying property a business might spend cash and obtain the asset – the net balance of the balance sheet doesn’t change since it converts one asset form to another.

One important measure of a company’s performance is how it manages it’s cash. Without cash (even though it may own a lot of assets on paper) a company cannot operate (bankruptcy is usually a sign that a company runs out of cash not assets – a company that owns a lot of property can still go bankrupt). The CFS details how much cash a company receives and how much it spent in a specific period as well as the net balance remaining.

If company runs out of cash, it is bankrupt. It is literally like the HP bar in videogames.

Cash flow statement tracks how much cash flows into an out of the company, and for what reasons. Operations Cash Flow is the responsibility of COO, Financial Cash Flow — of CFO, etc.

It is kinda similar to the bank statement for your checking account.

In contrast, Profit and Loss statement is more to compute taxabale profit, or give shareholders an idea of how profitable are the “normal operations” of the company, as opposed to one-time investments or divestments.