, 2009). Similar adjustments are made for items, such as expenses, taxes etc. (Stickney et al., 2009). The second section shows the cash inflows and outflows from investing. The figures shown are the changes that have occurred on the previous year. For example, if the firm makes a capital investment, the cost of that investment will be an outflow. If there is revenue created by an investment, such as the sale of the asset, this will be a cash inflow (Stickney et al., 2009).

The third section is the financing. The main components are the changes in debt; increased debt creates a cash inflow, whereas paying off debt creates an outflow. Any capital that comes into the firm or leaves the firm is included in this section. If dividends are paid, they will be a cash outflow in the financing section. The cash flow statement will end with a net total of the cash flow from all areas and a calculation of the difference between the current and the previous period.

By understanding what the cash flow statement shows and why it is created the importance may be appreciated. The statement shows important information that is valuable...

The statement accounts for the actual cash flow and shows the sources of that cash flow, an important element of assessing the financial health of a firm. For example, a firm that appears to make a loss following heavy investments may be making positive cash flows. It may be argued that whatever view is taken of a firm, one of the most important issues will be the cash it generates and how money is spent to support the operations. However, just as with any other financial statement, the interpretation of the results should not be read in isolation, the results may reflect different strategies and only show the position of the firm at a single point in time, negative cash flow is not always bad, just as a positive cash flow may indicate a lack of investment.
References

Kimmel, Paul D; Weygandt, Jerry J.; Kieso, Donald E, (2010), Financial Accounting, Wiley

Stickney, Clyde P; Weil, Roman L; Schipper, Katherine; Francis, Jennifer, (2009), Financial Accounting: An Introduction to Concepts, Methods and Uses, South-Western College Publishers