Financing and Marketing Management

Unit 6 - Basic Accounting Procedures or Analysis of Business Performance

6.4. The Cash Flow Statement
The limitations of balance sheet and income statement are that they fail to indicate timing and magnitude of cash flows. The cash flow statement overcomes these limitations. The fundamental principle in the preparation of cash flow statement is that the cash inflows are equal to cash outflows during a particular time period. It records farm or non-farm flows from a business. This shows how cash has been generated and used over the relevant time period. Most cash flow statement styles will present the flows of cash using 3 main categories:

• Operating cash flows
• Investing cash flows
• Financing cash flows

Operating cash flows will include the flows from the core operations of the business and is driven by trading. Investing cash flows deal with any investments in the future of the business. Any new plant and equipment would be included in this section. And finally the financing section deals with any investments made by shareholders and any dividends paid to them. Any new borrowings or any repayments of existing loans would also be shown in this section.