Pros and Cons of a Cash Flow Statement
Original post by Dennis Hartman of Demand Media
Cash flow statements are one type of financial report that businesses produce to record and present their financial activities to investors, analysts and financial professionals within the company. While cash flow statements have certain drawbacks as tools for investors, they still provide useful information for someone considering buying, or selling, stock in a company.
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A cash flow statement, which lists a business's short-term cash earnings and payments, provides financial information that other financial statements, such as balance sheets and income statements, don't contain. Each cash flow statement covers a given period of time, generally one year or one quarter, and outlines all sources of cash revenue during that time. It also lists where a business spends its cash, which provides valuable information about ongoing financial obligations such as payroll and monthly interest on outstanding debt.
Accounting standards allow for several different cash flow statement formats. For example, financial institutions not only have different sources of cash income than other types of businesses, but they also use different cash flow statement formats. Because investors may want to compare financial businesses against other types of companies before deciding whose stock to buy, these differences in cash flow statements pose a barrier to straightforward analysis.
Cash flow statements are generally short and simple enough for investors to analyze relatively quickly and without special accounting knowledge. They divide cash income and expenses into three main categories: operating activities, investing activities and financing activities. This serves as a table of contents for investors who want to know about specific cash components of a business. The shorthand result of a cash flow statement is a single number that shows the increase, or decrease, in cash for the period of time that the statement covers.
Cash flow statements also have the fundamental drawback of focusing on only one area of a business's finances. In addition, they only cover a limited span of time, which makes it necessary for investors to examine multiple recent cash flow statements to understand them in context of recognize patterns in how a business earns and spends its money. This specificity limits how effective individual cash flow statements are on their own.
- University of Northern Iowa: Cash Flow Statement
- "The CPA Journal"; The Cash Flow Statement: Problems with the Current Rules; Neil S. Weiss and James G.S. Yang; March 2007
- Accounting Coach; Cash Flow Statement; Harold Averkamp
About the Author
Dennis Hartman is a freelance writer living in California. His work covers a wide variety of topics and has been published nationally in print as well as online. Hartman holds a Bachelor of Fine Arts from Syracuse University and a Master of Arts from the State University of New York at Buffalo.
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