In the world of financial accounting, the cash flow statement is an important compilation of money-related business information. Although the first, official creation of such a financial statement didn’t take place until 1863, the need for it as well as primitive attempts at its creation greatly predate this point in time. What exactly is this important accounting tool, the cash flow statement?
Purpose and Physical Format
The ultimate purpose of the statement on cash flow is to isolate and identify fluid cash on hand as well as all of its deciding factors. This unique statement can accurately depict this financial data for any business or other money-handling entity. Unlike many other reports on assets though, this statement provides the reader with a specific picture of fluid cash on hand and its movements. When this distinction must be analyzed, accounting teams look to this statement for answers.
The statement itself can be composed digitally or on paper. It mostly consists of written material and mathematical graphics illustrating the data contained therein. The length of the statement can also vary greatly depending on how many variables affect on-hand cash and its movements.
An Accounting First
As aforementioned, 1863 was the year in which the first, officially documented cash flow statements were employed. Started in 1759, the Dowlais Iron Company had done very well for itself in the iron-smelting and trading business. The “comparison balance sheet” was the equivalent cash flow report with which the manager of Dowlais Iron Company went on to explain the perplexing notion that the company didn’t have sufficient cash on hand to buy new furnaces even though its recent profits had been great.
In this case, the company soon discovered that nearly all liquid cash assets had been transformed into assets in physical property. Obviously, this transfer of liquid cash was found to be too much, as physical cash was necessary for the upcoming purchase of a new furnace. Management’s creation of a revolutionary, new “comparison balance sheet” was the tool that explained this company’s cash flow situation and still explains those of companies today.
Sections of an Official Statement
There are typically a number of individual sections that compose the whole of the statement on cash flow. The most important sections however are the three principal segments – cash flow due to activities in operations, investing, and financing. Each of these three areas of cash flow relationships comes together to encompass all areas of company cash flow.
Rules in Computation
In order for such statements on cash flow status to be accurate, there are subsequent rules and understood standards in computation that must always be applied. These set the parameters of the entire equation of cash flow. Today’s standards in the computation of this all-important statement employ many individual rules. Mainly, these dictate what factors must be included in the mathematical process of creating the statement. A few examples of required factors of inclusion are –
- Payments related to mergers
- The purchase of merchandise
- Amortization figures
- Receipt of dividends
- Employee pay
- Loans made to suppliers
In the end, this all-important report on company cash flow is an integral part of accounting practice today. Without it, liquid cash assets become quite difficult to track and losses become a quick result. These are the basics of the cash flow statement and how it became an integral part of common business practice today.