Cash Flow Statement

The cash flow statement is considered one of the important parts of the annual report. It explains in detail the amount of incoming and outgoing cash flows in the company which gives a clear picture of the soundness of the financial activity in the company. The statement also lists a balance between monetary assets and cash equivalents since the beginning of the year until the end.

What makes the cash flows and cash equivalents important to such a degree is that it is essential for the success of the company. The company needs to pay its operating expenses and debt entitlements, and without the availability of cash it cannot finance expanding its investment, or its development.

Contents of Cash Flow Statement

Companies usually have many sources of cash and similar assets of cash that can appear in its cash flow statement. Its increase demonstrates the strength of the company’s financial status. A company usually divides it cash flow statements into the following categories:

  • Cash flow resulting from operating activities- illustrates the size of cash flow from or used in the company’s operating activities.
  • Cash flow resulting from investing activities: illustrates the size of cash flow from or used in the company’s investing activities.
  • Cash flow resulting from financing activities: illustrates the size of cash flow from selling the company’s shares, issuing debt instruments, or repaying loans or financial commitments.

The details in the three above categories represent the sources of cash and assets the company achieved. Moreover, it has a detail on the uses of this cash. If the company does not spend all the achieved cash, the rest of it will be shown in net cash flows component. It exactly equals the cash balance and what’s similar to it in the balance sheet by the end of the financial quarter.

Because the cash flow statement is a result of the change in cash in most of the items of both the company’s balance sheet and income statements, the cash flow statement would highlight all the variables on these items such as :

  • Short-term investments.
  • Long-term debts.
  • Dividends.
  • Zakat.
  • Accounts receivable.
  • Inventory.
  • Tangible assets.

What to look for in the cash flow statement?

The three important things that should be looked for in the cash flow statement are that the flow should be positive, large and increases with time. Putting aside the level of the achieved cash flow for the company, it is supposed to carefully check the three mentioned categories in the cash flow statement. They are (operational, investment and financial activities). The investor should also know the activities that bring the largest cash flows to the company and the modality in which these cash flows would be used. By this, it is possible to judge the company’s future performance. Usually the company that has a large cash reserve would be able to pay its obligations, distribute its profits and to solve emergency financial problems without the need to borrow or sell its assets.

It is important to note that the company’s high profits do not necessarily mean a positive cash flow. It is possible that there are some terms in the cash flow statement that raises the profits when it is not cash. It is possible that there are negative cash flows sometimes which do not give a bad impression on the company’s performance if the company used its cash in buying investment assets that supports the expansion in its area to achieve a good future performance.​