Financial Statements: The Statement of Cash Flows
In regards to financial statements, the statement of cash flows is especially useful. It basically consists of three parts:
- Operating activities – cash inflows and outflows from operating the business.
- Investing activities – cash inflows and outflows from buying and selling fixed assets, purchasing or selling investments or making loans.
- Financing activities – cash inflows and outflows from loan proceeds, repayment of debt principal, capital contributions and distributions to owners.
The financial statement can be misleading if not considered in conjunction with the balance sheet and income statement. The reason is that, when additional cash is collected or a payment is made, the financial statement can change significantly.
Other considerations in reviewing the financial results of a company include:
- Comparing operating results to industry benchmarks
- Trending operating results over a period of five years
- Modeling financial scenarios to plan for the future
These analyses help to stop negative trends that a company can address before it’s too late. They can help modify or cut unprofitable segments of the business and to manage cash flow. When necessary, the company can also use the analyses to determine financing needs.
The experts at Davis & Hodgdon Associates CPAs are available to help you use financial reporting to analyze your business and identify the information most important to your business. Please call 802.878.1963 or visit www.dh-cpa.com for more information.
