Purpose of the statement of cash flow || Preparation of Financial Statements || Bcis Notes

Purpose of the statement of cash flows || Preparation of Financial Statements

Statement of cash flow

The cash flow statement shows the exact amount of a company’s cash inflows and outflows over a period of time. The income statement is the most common financial statement and shows a company’s revenues and total expenses, including noncash accounting, such as depreciation over a period of time.

The Cash-flow statement provides an important ingredient of decision-making due to the company’s financial stability and viability. The success and survival of every organization depend on its ability to generate and acquire cash.

Purpose of the statement of cash flow

The purpose of the statement of cash flows is to present cash inflows and outflows for a reporting period to the reader of the report. These inflows and outflows are further classified into operating, investing, and financing activities. The information is used by the investment community to discern the ability of an organization to generate cash, and how the funds are then used.

Cash flows are not readily apparent when just reviewing the income statement, especially when that document is created under the accrual basis of accounting. Accrual accounting requires that certain non-cash revenue and expense items be included in the income statement, possibly in substantial amounts. A large disparity between the amount of reported income and the net change in cash flows could indicate that there is fraud in the preparation of a company’s financial statements.

The statement of cash flows is particularly important when an acquirer is reviewing the financial statements of a potential acquirer. The acquirer does not want to pay a price that cannot be supported by the cash flows of the acquiree, so it uses the statement in order to confirm the number of cash flows generated.

The statement also reveals the sources and uses of certain cash flows, which would not otherwise be readily apparent to the reader. These line items include changes in each of the current asset accounts, as well as the amount of income taxes paid.

The statement of cash flows is part of the financial statements, which also include the income statement and balance sheet. It provides information about a company’s cash receipts and cash payments in a period. The statement of cash flows provides information about a company’s operating, financing, and investing activities.

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