Cash Flow Statement

This statement measures liquidity. 

Liquidity refers to a firm’s ability to pay its obligations as they fall due. Cash is the most liquid form of asset.

Cash flow is the lifeblood of a business. Cash is required to pay employees, suppliers and pay for operational expenses. 

A cash flow statement shows inflows and outflows of cash into a business over a period of time. 

It enables a firm to know its current cash position and make predictions regarding future cash flows.

It does not measure profit!! Cash flows can be categorised as either:

• Operating activities (sales, paying wages, expenses - Income Statement activities)

• Investing activities (purchasing assets, selling assets - Balance Sheet adjustments on the asset side)

• Financing activities (new debt, paying off debt - Balance Sheet adjustments on the liabilities side)

Remember, the cash flow statement does NOT measure profitability or performance. 

Cash inflows might not be from business operating activity (could be new loan, or sale of asset).

Low cash levels indicate poor liquidity (inability to pay obligations as they fall due). 

This is a cash flow crisis that would force a business to obtain cash (discount sales, new investment, new loan, sale of unused asset, convert Accounts Receivable into cash).