What is the purpose of the cash flow statement?

Definition of Cash Flow Statement

The cash flow statement or statement of cash flows or SCF identifies a company's major cash inflows and outflows that occurred the same period of time as the company's income statement and between the period's beginning and ending balance sheets.

The cash flow statement is one of the required external financial statements.

Purpose of Cash Flow Statement

The purpose of the cash flow statement is to provide the readers of a company's financial statement with the cash amounts that flowed in and out of the company. This is needed because the accrual basis of accounting requires the income statement to show the revenues that were earned (not the money actually received) and the expenses incurred or matched to the accounting period (not the money actually spent). For example, the money invested by owners and the money received from lenders will not appear on the income statement. Neither will the money spent to repay loans or money spent for equipment or buildings.

In addition to the cash amounts arranged into three types of activities (operating, investing, and financing), the cash flow statement discloses the amount of interest paid, the amount of income taxes paid, and significant investing and financing activities that did not require the use of cash.

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