The statement of cash flows is a financial report that outlines the cash inflows and outflows of a business during a specific period of time. It is divided into three main sections: operating activities, investing activities, and financing activities.
1. **Operating Activities:** This section includes cash transactions involved in the company’s core business operations. It reflects the cash generated by the sale of goods and services, as well as cash spent on expenses like salaries and rent.
2. **Investing Activities:** This part shows cash spent on or generated from investments, such as purchasing or selling fixed assets and securities. For example, buying new equipment would reflect a cash outflow here, while selling an old asset would be a cash inflow.
3. **Financing Activities:** This section covers cash flows related to the company’s capital financing. It includes transactions with the company’s owners and creditors, such as issuing stock, borrowing loans, or paying dividends.
The main purpose of the statement of cash flows is to provide insights into a company’s liquidity and overall financial health, highlighting how well it generates cash to meet its obligations. Unlike the income statement, which may reflect profitability, the statement of cash flows offers a clear view of cash management and is crucial for investors and creditors when making informed decisions.