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Cash Flow Statement


Cash contributes significant role in the entire economic activities of the business world.

And at the same time, cash is not only essential for business, but is also essential for each and every activity of human life. ‘What blood is to human body, cash is to a business firm? The firm receives cash from various sources like issue of shares, sale of assets etc. It needs cash to make payments for various purposes like payment to suppliers and to meet out the day to day expenses. The foremost responsibility of the financial manager is to determine cash planning activities and to maintain adequate cash balances. At this juncture cash flow statement is an important tool of cash planning and control. The term cash is used to refer to cash in hand and bank balance.


Cash flow statement is a statement which is prepared from the historical data showing the inflow and outflow of cash. It shows the sources and uses of cash between the two balance sheet dates. It clearly explains the causes for changes in cash position between two periods. Simply, it is a receipts and payments account in a summary form.



Cash flow statement is an important tool of financial analysis. It is vital to financial management. Its main uses are as follows:

(i)                 It gives guidance to the management in taking and implementing short-term financial policies.

(ii)               It helps to strengthen the borrowing capacities of the firms. The financial institutions can easily assess the repaying capacities of the firms through the cash flow analysis.

(iii)             It contributes significant role for the capital budgeting decisions.

(iv)              It helps in short term financial decisions relating to liquidity.

(v)                In order to find out the variation and take necessary remedial measures with the help of the comparison of actual cash flow statements with the projected cash flow statements.

(vi)              To overcome the problem of meeting deficit cash or investment of surplus cash with the help of the projected cash flow statement. Thus, projected cash flow statement is usually prepared on the basis of past years’ experience.

(vii)            It explains the causes for poor cash position in spite of huge profits or surplus cash balance in spite of low profits.

It explains the major sources and uses of cash for the business concern during a particular period of time.