1) What is the purpose of Statement of Cash Flows? 2) Why do we need Statement o
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1) What is the purpose of Statement of Cash Flows? 2) Why do we need Statement of Cash Flows? 3)Statement of Cash Flows tracks net changes in cash flow. Transactions are grouped into 3 categories, Operating, Financing and Investing. Provide one sample transaction for Financial Activity Cash Inflow. (i.e. borrow $5000 from the bank) Provide one sample transaction for Investing Activity Cash Outflow. (i.e. purchase a truck) 4) Cornpanies p?efer ille lndi?ect Methed fr Oporating activity. What is the starting point?Explanation / Answer
Ans 1 Cash flow statement is required by GAAP to be included in the financial statements. The cash flow tells how the cash is used and generated during the financial year of the entity. So from the cash flow statement we could see from which source the cash has come from and whether the cash will be generated in the future from the same source or not. It is important to know the statement to know the cash generating ability of the entity. There are three type of cash activities operating activities, investing activities and financing activities. Now we the net cash from operating activities which included the cash from regular business is positive and able to cover some cash part used in investing activities, than we can interpret that the entity is able to generate sufficient cash from its regular business and able to finance its investing activities, this gives a positive indication that the company is performing well and if the cash flow from operating activities is negative this shows that the company is not able to generate sufficient cash from its regular business, even is not able to meet the short term commitments and have to take cash to meet it from either financing or investing sources. So, Cash flow statement is important in knowing the cash generated and used which also helps in assessing the future cash needs.
Ans 2 Manager can benefit using cash flow statement on routine basis by knowing that do the entity has sufficient cash to meet its short term obligations like payment to creditors, expenses etc. If the net cash flow from operating activities is positive this means that the company is able to meet its routine expenses and payment by the revenue received in cash. If in case there is negative balance this means managers should make extra effort to collect cash from its customers and also to negotiate the credit term period with its creditors etc.
As there can be non cash activities which may increase/decrease the assets or liabilities from example issue of bonds in exchange for purchase of machinery so this does not affect the cash flow statement so as there is increase/decrease in assets and liabilities so in the notes it is important to mention that there were non cash activities during the financial year. As when we see the Balance Sheet, and for example there is increase in fixed assets than we could interpret that the funds are used for this but if going deep there can be a situation when for example bonds also increase without increasing the cash flow. So we need to see generally all the fixed assets accounts and majorily long term liabilities account to know the transactions which occurred during the.
Ans 3 Financial Activity is XYZ borrowed $5000 from bank as a long term loan.
Investing activity example purchase of truck/equipment for $5000 from ABC Ltd.
Ans 4 The starting point is Net Income.
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