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Statement of cash flows reports cash receipts, cash payments,
and net changes in cash resulting from operating,
investing, and financing activities of an enterprise
during a period, in a format that reconcile the
beginning and ending cash balances.
The
primary purpose of Statement of cash flows is
to provide information about an entity's cash
receipts and cash payments during a period. A
secondary objective is to provide information on a
cash basis about its operating, investing and
financing activities.
Usefulness of the
Statement of Cash Flows:
The
information in a statement of cash flows should help
investors, creditors, and others assess the
following:
Future Cash Flows:
A
primary objective of financial reporting is to
provide information that makes it possible to
predict the amounts, timing, and uncertainty of
future cash flows. By examining relationship between
items such as sales and net cash flow from operating
activities, or net cash flow from operating
activities and increase or decrease in cash, it is
possible to make better predictions of the amounts,
timings, and uncertainty of future cash flows than
is possible using accrual basis data.
Ability to Pay of Dividend and Meet
Obligations:
If a
company does not have adequate cash, employees
cannot be paid, debts cannot be settled, dividends
cannot be paid, and equipment cannot be acquired. A
statement of cash flows indicates how cash is used
and where it comes from. Employees, creditors,
stockholders and customers should be particularly
interested in this settlement, because it alone
shows the flows of cash in a business.
Difference between Net Income and
Net Cash Flows from Operating Activities:
The
net income number is important, because it provides
information on the success or failure of a business
enterprise from one period to another. But some
people are critical of accrual basis net income
because estimates must be made to arrive at it. As a
result, the reliability of the number is often
challenged. Such is not the case with cash. Thus
readers of the financial statements benefit from
knowing the reason for the difference between net
income and net cash flow from operating activities.
Then they can assess for themselves the reliability
of the income.
Non-cash Financial and Investing
Transactions:
By
examining the company's investing activities
(purchase and sales of assets other than its
products) and its financing transactions (borrowings
and repayments of borrowings, investments by owners
and distribution to owners), a financial statement
reader can better understand why assets and
liabilities increased or decreased during the
period. For example, the following questions might
be answered:
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How did cash increase when there was a net loss
for the period?
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How were the proceeds of the bon issue used?
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How was the expansion in plant and equipment
financed?
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Why were dividends not increased?
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How was the retirement of debt accomplished?
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How much money was borrowed during the year?
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Is
cash flow greater or less than net income?
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