Purpose of Cash Flow Statements

Discovery of Cash Flow Information: The fundamental purpose of a cash flow statement is to deliver detailed information about how a public limited company generates and allocates its cash and cash equivalents. This includes the various sectors–operating, investing, and financing–that produce cash inflow or outflow.
Assessment of Liquidity and Solvency: The cash flow statement plays a significant role in assessing a company’s ability to meet its short-term and long-term obligations. By displaying the cash inflow and outflow information, it enables one to assess how effectively the company manages its liquidity and solvency.
Comparison Tool: The cash flow statement provides valuable information that helps compare the company’s cash performance over different financial periods. It offers insights into changes in net cash position allowing investors and analysts to compare businesses of different sizes across different industries.
Future Projections: From an investor’s perspective, a cash flow statement can determine the short-term viability of a company, especially its ability to pay bills. Investors and financial analysts can use this statement to predict future cash flow patterns and devise appropriate investment strategies.
Checking Profitability: Despite a company having a substantial profit in the income statement, the company could still be struggling digitally on cash. Therefore, the cash flow statement is important to check a company’s actual cash inflow and outflow against profit or loss reported in the income statement.
Performance Evaluation: Investors use the cash flow statement to understand the cash cycle of the company and evaluate their operations and financing decisions. This helps investors assess management efficiency in using cash to generate returns.