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Cash Flow Statement: How Can It Be Used To Reconcile Net Income With Change In Cash?

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Cash flow statement is also demarcated as the statement of cash in the financial accounting. Cash flow statement helps to define the change in the balance sheet of the accounts and the income effect on the cash and the cash equivalents. Cash flow statement aids to break down the evaluation to investing, operating and the financing activities.  

The cash flow statement of the company is defined as the financial statement of the company which helps to determine the cash that has been generated or used by the company in a given time period. The cash flow statement as mentioned above breaks the economic resources of the company and the other resources and divides it into three categories which are, cash flow of the company from the investing activities, cash flow of the company from the operating activities and the cash flow from the financing activities.

Cash flow statement is often confused with net income, but the cash flow statement is not as same as the net income. Net income is the economic transactions which did not involve the actual transactions of the money. One of the general example of the net income which is not included in the cash flow statement is the money depreciation, which is a non-cash statement but is incorporated in the net income and is excluded from the cash flow statement.

Cash flow statement which is independent of its measurement, helps the company to develop, expand, buying of stock, dividends and also helps to reduce the debt. It is also one of the possible reason, for which the cash flow statements holds more value for the company than any other financial statement. Cash flow statement of the company depends upon the economic state of the company from the operations, which is correlated with the net income of the company.

If a company is being on the negative cash flow for a shorter period of time, it does not harm the company. However, if the negative cash flow of the company is continued for a longer period of time, it might reduce the economic state of the company. In such condition, in order to keep the business running, the company might have to borrow money from other companies. Usually the investors look for the company which have low share price but high cash flow.

The cash statement from the operating activities is reconciled from the net income from the cash in hands by calculating it according to the provided formula:

Cash flow from the operations = net income+ alterations in the working capital = non-cash expenses

Working capital of the operations is the component of the cash flow. Investors of the company should be aware of the fact that the company may influence the cash flow by expanding the time period which was taken by the company to reimburse the bills and helps to preserve the cash, lessening the time to collect their own property and helps to quicken the receipt of the cash.

Cash flow from the investigating activities reflect the purchase of the company and the sales of the capital assets. It is often observed that there are certain items of the company which may or may not be included in the capital expenditure and the investors of the company should be aware of this considerations while comparing the cash flow of the other companies.

Cash flow from the financing activities deals with the purchase of the company, sale of the stock and any payments and proceeds on the debt financing. This specific cash flow from the financing activities measure diverges with the dividend policies, various capital structures an debt terms of the companies.

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