What is Statement of Cash Flows (SCF)?
The Statement of Cash Flows (SCF) is one of the three main financial statements presented by companies (the
other two are the balance sheet and income statement). The statement of cash flows must be presented by all businesses, for-profit and non-profit, public and private, whenever the company presents either a balance sheet and income statement or just an income statement. Thus, if a company presents income statements only and no balance sheets for prior periods, it must also present the statement of cash flows for each of the prior periods.
The primary purpose of the statement of cash flows is to provide information regarding receipts and uses of cash, cash equivalents, restricted cash, and restricted cash equivalents for the company during a period of time.
The term “cash” is used in the context of the statement of cash flows to refer to the total of cash, cash equivalents, restricted cash, and restricted cash equivalents. The four classifications are combined for purposes of reporting activities on the statement of cash flows.
Classification Within the Statement of Cash Flows
The statement of cash flows presents all the receipts and uses of cash of the company during the period.
For the purposes of presentation and usefulness, the cash activities are broken down into three categories of activities in the statement of cash flows. These three categories are:
- Operating activities
- Investing activities
- Financing activities
Benefits of the Statement of Cash Flows
- The statement of cash flows provides the most information about cash and how the company receives and spends cash. It helps users to assess the ability of the company to generate positive future cash flows to meet its obligations as they come due and to pay dividends.
- It helps users to assess the reasons for differences between net income and net cash inflows and outflows.
- It helps users to assess the effect of investing and financing transactions on the company’s financial position.
- It helps users to assess the company’s need for external financing. A negative operating cash flow and a positive financing cash flow indicate the company is financing its operations with either debt or equity. An examination of the financing section of the statement will reveal whether debt or equity is being used.
- Lenders can use it to assess the ability of a company to repay a loan.
- Investors can use it to determine if the company will be able to continue to pay its current level of dividends in the future or whether it might even be able to increase its dividend.
Limitations of the Statement of Cash Flows
- • The statement of cash flows shows only how much cash was received and paid out for operating, investing, and financing activities. For the information on a statement of cash flows to be fully utilized, it often needs to be interpreted in the context of other information in the other financial statements.
For example, a positive operating cash flow may have been achieved by not paying the payables when due, an important thing for users to know. For users to recognize the existence of past due payables, they need to use the balance sheet and income statement. - The indirect method (covered in detail later) of preparing the operating cash flows section of the SCF does not show the sources and uses of operating cash individually but shows only adjustments to accrual-basis net income, a limitation that can cause a user to have difficulty in using the information presented.