• Where does the company get its money from? And where does it spend it?
• How efficient is the company in collecting its debts and paying its obligations?
• Does the company still rely on external financing, or has it begun to rely on its own cash assets?
• And most importantly, is the company on the verge of bankruptcy? Or does it maintain good and sufficient cash flow?

These questions, and others, are certainly of interest to every investor, manager, auditor, supplier, or client of the company, and their answer can be found among the figures in the Cash Flow Statement:

The importance of cash liquidity:

Cash flow is the true lifeblood of the company and what will keep the company alive.

Cash flow is important for paying employee salaries, rent, taxes, supplier dues, purchasing machinery, repaying loans and bank interest, and other obligations.

Therefore, the company must enhance its ability to inject liquidity appropriately, whether from its main operating activities or through investment and financing activities.

What is a cash flow statement?

It is one of the four most important well-known financial reports, as this list explains in detail the size of the cash flows entering and leaving the company during the financial period, thus providing a clear picture of the soundness of the company’s financial activity.

The cash flow statement details the sources of cash and cash equivalents and how they are spent on operating, investing, and financing items. It also provides a balance between cash and cash equivalents from the beginning to the end of the year.

How does the cash flow statement differ from the profit and loss statement?

While the income statement provides a picture of the company’s profit or loss during the financial period (according to the accrual principle), the cash flow statement explains in detail the sources of cash inflows to the company and how it is used.

To put it simply and for clarity, a company typically obtains cash and spends it on three main activities:

Operational cash flow activity :

It includes receipts from customers (cash inflow), payments to suppliers, the company’s operating cash expenses, and also the repayment of interest on bank loans and bonds (cash outflow) during the financial period.

Investment activity : Investment Cash Flow

The proceeds from the sale of long-term investment assets such as fixed assets (cash inflow) and the payment made for the purchase of these assets also (cash outflow) during the financial period.

Finance Cash Flow Activity :

The proceeds include external financing and capital increases (cash inflow) and payments made for dividend distributions and bond repayments (cash outflow) during the financial period.

The results of the three cash financial activities provide indicators of the company’s cash position, as shown in the following table:

This means that a company that relies on liquidity coming from its operating activity is a company that manages cash flow very efficiently, and relies on its own resources without needing to look for external sources of liquidity such as loans and foreign investments.

example:

In the fourth quarter of 2021, Apple ended the year with excellent financial results, boosted by an increase in cash assets of $2.701 billion, compared to a decrease of $3.860 billion in the third quarter. (Note: The cash flow statement above is prepared using the indirect method.)

According to the following list, Apple’s three cash flow indicators were positive.

Operating activity was positive, and the company is expanding its investment despite the negative investment flow figures, and is settling its external obligations despite the negative investment flow figures:

Apple’s positive cash results have strengthened its position at the top of the list of the world’s most valuable companies, surpassing Microsoft, Google and even Amazon.

It is worth remembering that the cash flow statement is prepared in one of two ways:

• The Direct Method.
• The indirect method.

Despite the different preparation methods, the results are the same in both methods.