Income statements and balance sheets provide important financial information, however a statement of cash flow is vital to determine a company’s outflow and inflow of cash. Essentially it is a map that tells the manager/owner where cash is coming in from and where it is going out to. A company can show a profit and still be running out of cash, so monitoring the cash flow statement to identify areas of imbalance is crucial.
Cash flow statements monitor cash receipts and cash payments in three separate categories; operating, investing, financing. The information these statements provide is important to decision makers because it indicates where expenditures are financed through. It is more favorable for a company to use cash instead of selling assets. It can assist in determine if a business is able to pay its obligations, and if it has the ability to meet unexpected obligations.
Some transactions do not directly affect cash receipts or payments, however must be disclosed in the notes sections of the cash flow statement under noncash investing and financing activities to be compliant with the full disclosure principle.