Cash flow statement

Published on November 30, 2017   18 min

Other Talks in the Series: Accounting Records and Accounts

Hello, this is Huw Morgan from the Alliance Manchester Business School. This is the 10th talk in the series of lectures on accounting records, and this session discusses the importance of the cash flow statement in explaining the movement of cash between accounting periods and how a cash flow statement is constructed.
The income statement explains how business has generated profit in the period, explaining the movement in equity between the opening and closing balances in a statement of financial position. The cash flow statement explains the movement in cash between the same two statements of financial position. Whilst generating profit is of course important, it's probably more important, particularly in the short-term, to ensure that the business has sufficient cash balances. Profit represents the difference between revenue and expenses for the period, but may have little relation to the cash generated for the period.
The cash flow statement is based upon movements in cash and cash equivalents. Cash relates to notes and coins in hand and deposits in banks that are accessible on demand. A bank overdraft is a part of cash, it's a negative cash balance. And cash equivalents a short-term, highly liquid investments, readily convertible to cash held to meet short term needs rather than investment purposes.
In session eight, we saw the various sources and uses of cash in the business. In addition to the working capital cash cycle, which deals with a generation of cash through trading on credit, a business will need to ensure the day-to-day running costs of the business are met and have cash available to pay tax on any profit earned. It must also consider the long term. It will need to invest in non-current assets, normally funded from two possible sources. His owners can provide additional capital or the business can borrow cash from external lenders. Whilst income statement includes a depreciation expense representing the using up of non-current assets and interest costs, the costs you're borrowing, investing and financing transactions are not fully represented in the income statement. So the income statement tells only part of the story of a business's cash dealings. Movements in cash come from three distinct sources,