Question

In analyzing the statement of cash flows, why is it important that it be segmented in the manner it is?

Answer 1

A cash flow statement, also a technique of financial analysis , is a statement that depicts how changes in balance sheet accounts and income statement, affect cash and cash equivalents, and categorize the analysis to operating, investing, and financing activities.

The cash flow statement is concerned with the inflows and outflows of cash in business. For effective analysis of cash flow statement it is necessary to segment it into operating, investing and financing activities.Because of this segmentation, cash flow statement inculcate both the current operating results together with changes in the balance sheet and income statement.

For business enterprises using cash basis accounting, cash flow statement and income statement potrays similar information, as inflows of cash are considered as income and outflows of cash are taken as expense payments or other types of payments (i.e. asset purchases).

So, it is important to classify the cash flow statement, as operating activities shows the information on business operations, same as income statement, investing activities shows transactions related to long term assets and investment and the financing activities section shows transactions connected with financing or capital decisions. So, in this way, it serves the functions of both income statement and balance sheet.