Interpreting and understanding accounts An ACCA case study
Page 5: The Cash Flow Statement
A healthy business generates a continuous flow of cash through its trading operations. Every business needs cash to pay for its on-going expenses and to settle debts as they arise. Running out of cash would mean being unable to make these payments. This could lead to a business entering into liquidation. The Cash Flow Statement tracks how cash has moved into and out of the business over the preceding year. It reveals how much cash was generated from inside the business (e.g. sales) and how much was obtained from external finance (e.g. loans).
The statement starts with cash flows from operating activities. This refers to all cash movements that have arisen from the trading activity of the business itself, this includes all sales and corresponding costs, plus all payments relating to interest, tax and dividends. Following this are investing activities which are mainly concerned with buying and selling non-current assets such as property, equipment or stakes in other firms. Finally financing activities refer to all cash flows to or from banks and shareholders.
The Cash Flow Statement is important to managers but also to shareholders, creditors and employees. Too much cash is wasteful since it should be invested for the best returns. On the other hand, running short of cash can be a threat to the very survival of the business. ACCA qualified accountants analyse a business’ Cash Flow Statement to offer financial advice to help safeguard the future of the business.