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Statement of Cash Flows:

Learning Objectives:

After studying this topic you should be able to:
Define and explain statement of cash flows.
Define and explain operating, investing and financing activities.
Understand the steps in preparing a statement of cash flows.
Differentiate between direct and indirect method.
Prepare statement of cash flows using direct and indirect method.


For any business it is important to ensure that:
  • Sufficient profits are made to finance the business activities.
  • Sufficient cash funds are available as and when needed.

We ascertain the amount of profits in a profit and loss account. We also show what the assets, capital and liabilities are at a given date by drawing up a balance sheet. Although the balance sheet shows the cash balance at a give date, it does not show us how we have used our cash funds during the accounting period.

What we really need, to help throw some light on to the cash situation, is some form of statement which shows us exactly where the cash has come from during the year, and exactly what we have done with it. The statement that fulfill these needs is called a statement of cash flows or cash flow statement.

Many people say that if we are making profits then there should be no shortage of cash. This is not true. In fact many businesses fail and are wound up because of cash shortages, despite adequate profits being made. For example, a company has been over-generous with credit terms to debtors, and last year extended the time in which debtors could pay from one months to three months. In addition it has taken on quite a few extra customers who are not creditworthy and such sales may result in bad debts in future. Statement of cash flows can help to signal the development of such problems.

Read our high quality articles about "statement of cash flows" topic:

Definition, Explanation and Purpose of the Statement of Cash Flows
Classification of Cash Flows
Format and Sections of Statement of Cash Flows
Steps in Preparing Statement of Cash Flows
Statement of Cash Flows - Direct Method
Statement of Cash Flows - Indirect Method
Direct versus Indirect Method of Cash Flows




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