Why do we need the Statement of Cash Flows? How does it help management? In the

Question

Why do we need the Statement of Cash Flows? How does it help management?

In the Operating Activities computation: Why do we add back non-operating losses? Why do we subtract non-operating gains? Why do we adjust Depreciation Expense?

Explain how a firm can have a Positive Net Income on the Income Statement but a negative Cash Flow from Operating Activities on the Statement of Cash Flows?

Why are non-cash investing and financing activities mentioned in the Statement of Cash Flow? Give an example of an event that belongs here.

Explanation / Answer

Financial statement contains Balance sheet ,Profit and loss accounts and Cash flow statements .Cash flow statement contains cash inflow and outflow of the company from various activities and there are three types of activities invoived in cash flow statement

1. Operating activities - It contains cash inflow and outflow from regular business activities such as purchase of goods and sale of goods etc

2. Investing activities - It contains net cash inflow or outflow from investments such as purchase and sale of assets etc

3.Financing activities - It contains net cash inflow or outflow from financing such as interest paid on notes etc

Non operating activities such as debt issuance cost, amortization and depreciation in add back in cash flow since there was no cash involved in the activities and it is debtied or credited in profit and lost account these should be added back or subtracted from opeating activities

There can be situation such as postive net income because of profit on sale of asset or dividend income however there can be negative cash flow because operating activities contains only the cash inflow and outflow arising from general business and not on profit on sale of asset and hence this situation arises

Non cash investing and financing activities mentioned in below the cash flow statement for the purpose of presentation and it should be disclosed for the understanding of share holders Example - conversiion of debt to common stock

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