Question

Explain the purpose and the format of the statement of cash flows. Also, describe its relevance to decision makers. please use your own words, and no handwriting please, thank you!

Answer 1

Cash flow statement is a statement which shows changes in the cash of a firm between two periods. Along with changes statement also shows reasn for such changes which helps in better functioning of business. Cash flow statement is a planning tool which is useful in short term planning. A enterprise needs cash to for its operations and other requirements, analysis of the same helps in management of cash efficiently.

Format of cash flow statement

Cash flow from Operating activities (A) XXX.   Net profit before tax and extraordinary items. XXX. Adjustments for. XXX -Depreciation. XXX - Foreign exchange. XXX -investments. XXX -Gain or loss on sale of assets. XXX -interest or dividend. XXX Operating profit before working capital changes. XXX Adjustments for -Trade and other receivable. XXX - Inventories. XXX - Trade payable. XXX Cash generated from operations. XXX - Interest paid. XXX - Taxes. XXX Net cash from operating acivities. XXX
Cash flow from Investing activities(B) Purchase of fixed assets. ( XXX) Sale of fixed assets. XXX Purchase of investments (XXX) Interest received. XXX Dividend received. XXX Net cash from Investing activities. XXX
Cash flow from finanicng activities(C) Proceeds from issue of share capital. XXX Proceeds from long term borrowings. XXX Repayment of capital or borrowings or finance liabilities (XXX) Dividend.paid. XXX Net cash from financing activities. XXX
Net increase or decrease in cash and cash equivalents ( A+B+C). XXX Cash and cash equivalent at the beginning. XXX
Cash and cash equivalent at the end. XXX

Relevance of cash flow statement

It helps in managing cash efficiently i.e how much cash is avalible at particular point of time

Is helps in understanding movement of cash i.e from where the cash has been obtained and to wheere it is applied

Historical information about cash helps in estimation of future requirement

It shows if the cash is efficiently being managed by company or not so that company can make corrections on time