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BigFella9503 BigFella9503
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A month ago
Assume your friend has taken an accounting course in high school and is familiar with the balance sheet and income statement. However, she is not so familiar with the statement of cash flows.

Required:

Explain to your friend why the statement of cash flows is an important financial statement just like the balance sheet and income statement. In addition, explain to her how the information is presented in the statement of cash flows.
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Managerial Accounting

Managerial Accounting


Edition: 4th
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babolat00babolat00
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A month ago
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Although the income statement may show a nice profit, a company's cash flow position may be poor. The statement of cash flows helps in evaluating the company's liquidity and in predicting its future cash flows. The statement of cash flows explains the change in the cash account balance between the beginning and end of the period by showing how cash was generated and spent. Shareholders and creditors are interested in determining the likelihood that a company will be able to meet future cash obligations. The statement helps financial statement users to understand the differences between the company's net income and the cash generated by its operations.

The statement is classified into three categories: operating activities, investing activities, and financing activities. Each section shows a company's sources of cash and uses of cash during the period. Operating activities are the activities that accomplish the company's purpose for being in business — primarily selling goods or providing services. The sources and uses of cash provided by operating activities represent the cash effect of the revenues and expenses reported on the income statement. There are two approaches to presenting cash flows provided by operating activities. The indirect method, the most popular method, starts with net income and adjusts for non-cash items. The direct method reports the specific operating activities that provide and use cash, such as inventory purchases and collections from customers.

Investing activities are those activities that affect a company's investments in assets other than current operating assets. Examples of investing activities are acquiring or selling property and equipment and investing in other companies' stock.

Financing activities are activities that involve external funding. Borrowing money and selling new shares of stock are sources of cash while repaying borrowed money and repurchasing shares of the company's own stock and paying dividends are uses of cash.

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BigFella9503 Author
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A month ago
Smart ... Thanks!
lubennick
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Yesterday
Correct Slight Smile TY
big_larry_samp
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2 hours ago
Good timing, thanks!
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