Cash inflow and Cash outflow 

Uses of Statement of Cash Flows

To survive, a business must generate a positive cash flow, meaning that long-term cash outflows must be less than long-term cash inflows. Users rely on financial statements regarding cash flows to assess the ability of an organization to generate cash and cash equivalents to evaluate the company’s liquidity. The CFS also highlights the requirements of the organization to use those cash flows, which help indicate the organization’s solvency or ability to meet long-term expenses and to accomplish long-term expansion. The cash outflows may also signal financial flexibility that, in turn, suggests fewer restrictions may affect financing and investment decisions. Such information enables investors to predict dividends or interest the company will distribute. It also enables investors to evaluate the potential risk of an investment in or a business relationship with the company. In turn, management relies on the cash flow statement to predict future cash flow, which they use to budget for future operations.

Statement of Cash Flows

Companies unable to generate sufficient cash to cover operating costs and debt service payments file bankruptcy. The success of a business depends on generating cash flows. As a result, Generally Accepted Accounting Principles require the creation of a statement of cash flows which documents both the sources and uses of cash during an accounting period, and thus the impact of a firm’s investing, financing and operating activities

Cash inflow 

Cash inflows include the transfer of funds to a company from another party as a result of core operations, investments or financing. Such cash inflows include payments to the company by customers and banks and the contribution of equity by investors who purchase the company’s stock or partial ownership in a company. Cash inflows also result from the sale of property, a plant or equipment as well as legal settlements. Such sources of cash also include loans, mortgages, and bonds.

Cash outflow 

Cash outflows include the transfer of funds by a company to another party. Such cash outflows include payments to business partners including employees, suppliers or creditors. Cash outflows also occur when long-term assets are acquired, investments are purchased, or settlements and expenses are paid. The redemption of stock and the payment of cash dividends also result in the outflow of cash.