What is a Cash Flow Statement?
A cash flow statement is an accounting of how money flows through a company. Though it may be easy to confuse the two, the statement of cash flow is distinct from the income statement. These financial statements are required parts of a public company's quarterly and annual statements. When combined, analysts take the cash flow statement, the balance sheet, and the income statement to determine a firm's overall fiscal health and valuation. The cash flow statement shows investors and other stakeholders how the company generates cash and uses it to pay debts and other obligations. Some firms find that their healthy net income figures are overwhelmed with expenditures. Thus the net income is incapable of overcoming a firm's obligations. Companies with such a weak cash position may need to take a line of credit to pay their obligations, while those with strong cash flow, where net income exceeds expenses, can pay their creditors, employees, and other vendors in a timely fashion.
When created under the direct method, the cash flow statement only reflects actual cash on hand. If the company is expecting revenue in the future, such as monies owed from a credit sale, that is reflected elsewhere. Nor does a direct method cash flow statement reflect obligations in the future, such as balloon payments.An indirect method cash flow statement, on the other hand, reflect future payments and income and thus are more closely tied to the balance sheet and income statement.