Cash Flow Statement for the Research Proposal

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Each section of the cash flow statement tells a different part of the firm's story. For example, it may be understood by management that significant amounts of their profits went into new buildings and equipment. What the cash flow statement does is isolates that information. Management and shareholders alike can extrapolate that data from the balance sheet, noting changes in fixed assets, but the presentation of the cash flow statement provides a clean, easy-to-understand summary of those transactions.

The same situation occurs with regards to financing activities. These can have a dramatic impact on the firm's cash position. The firm's bank account may look much healthier after a year in which stock was issued, but the cash flow statement allows management and investors to understand the role that stock issue played in the improved bank balance.

This is critical to understanding whether the firm is improving its cash position through strong operations or through the issuance of debt or equity.

By isolating this information, we can see some of the ways in which cash flow statements can prove useful, alongside the profit and loss report.

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The P&L report is necessary, because it is constructed in accordance with accounting principles on the accrual accounting basis. The cumulative effect of the different items on the P&L report, however, can distort the firm's actual performance. The cash flow statement helps to deconstruct the P&L report to unwind these distortions.

Another use for the cash flow statement is to explain the reasons for the changes in the company's cash position. Many firms keep close track of their cash position, for any number of reasons. It is important to have a means by which management can track the changes in the cash position. The different transactions that affect the cash position do not always show up on the profit and loss report. Thus, a special statement needs to be created in order to better explain these changes, both to management and to….....

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