What is cash flow statement? Why it is important for the organization?

A cash flow statement is one of the important components of financial statements — considered its fourth component — which provides information about the changes in the cash balance shown in two consecutive balance sheets by reporting the firm's cash flow during the period and outlining the sources of cash generation and the uses of cash; as per NAS-3 it must be presented as an integral part of the financial statements for every period for which financial statements are presented.

1. What it shows: it shows how both the operating results and the changes in balance sheet accounts affect cash and cash equivalent, and it answers three questions — where did cash come from, how was cash used, and what was the change in the cash balance.
2. Why it was developed: it was developed to remove the drawbacks of the other statements. A balance sheet shows only the closing cash balance, so comparing two balance sheets tells you whether cash rose or fell but not why; and the income statement, being on the accrual basis, may show good profit even though the actual cash received out of that profit is too little to run the business — the cash flow statement fills exactly this gap.
3. Its three sections: it contains operating activities (income statement items along with working capital items — the day-to-day flows), investing activities (changes in investments and long-term assets), and financing activities (changes in long-term liabilities and stockholders' equity); the total of the three gives the net change in cash, which added to the opening balance gives the closing cash and cash equivalent.
4. Better indicator for cash planning: it summarises performance on a cash basis whereas the income statement is on the accrual basis, which makes it a far better indicator for future cash planning and for forecasting the financial needs of the firm.
5. Useful for internal financial planning: it discloses the movement of internal funds relating to operating activities, so it is more appropriate for internal planning, reporting, controlling and decision-making.
6. Control over cash: it is one of the advanced techniques of financial accounting for controlling cash, since it brings all cash receipts and cash payments during the year under one statement.
7. Explains the causes of change in cash: it explains the reasons behind the change in cash and cash equivalent between two dates — the very thing that a mere comparison of balance sheets cannot tell.
8. Reveals liquidity and solvency: it provides information about the liquidity and solvency of the firm and about its ability to alter cash flows in future circumstances, showing whether day-to-day operations generated more cash than they used.
9. Enables critical analysis by stakeholders and evaluation of financial health: interest holders of the company can easily and critically analyse the organization with its help, and various user groups use it to evaluate financial health — paying special attention to the cash flow adequacy ratio and cash flow per share, both based on the net cash generated during the period.
10. Aids investment and financing decisions: it is useful for internal and external decisions such as project expansion, replacement of projects and the repayment of short-term and long-term debts.

Hence the cash flow statement is important because profit and cash are not the same thing: it converts the accrual-based results into cash terms and thereby tells management, investors and lenders whether the organization is actually generating the cash it needs to survive, invest and repay.