Question

Since all of the data used in the preparation of the Statement of Cash Flows are available on the other financial statements or in mandatory footnote disclosures, why prepare it? What insights does it provide that make it valuable to the financial statement reader?

Answer 1

A cash flow statement provides information about the changes in cash and cash equivalents. A cash flow statement id divided into operating, investing and financing activities. It is a one of the important key report to be prepared for each accounting period for which financial statements are presented by an Organization.

The Profit and Loss account would reflect the profits or loss of business but does not give any indication of the cash components. The important information of what the business has been doing with the cash is provided by the cash flow statement. Cash flow statement covers the flows of cash over a period of time.

Insights of Cash Flow Statements

· Statement of cash flows provides important insights about the liquidity and solvency of a company which are vital for survival and growth of any organization and Profit and Loss account are unable to specify.

· As the liquidity position is known, any shortfalls can be arranged for or excess can be used for the growth of the business.

· Cash Flow analysis together with the ratio analysis helps measure the profitability and financial position of business.

· It enables analysts to use the information about historic cash flows for projections of future cash flows of an entity on which to base their economic decisions.

· Also useful the management to plan and control the financial operations properly and formulation of financial plans.

· By summarizing key changes in financial position during a period, cash flow statement serves to highlight priorities of management.

· Any discrepancy in the financial reporting can be gauged through the cash flow statement by comparing the cash position of both.

· Comparison of cash flows of different entities helps reveal the relative quality of their earnings since cash flow information is more objective as opposed to the financial performance reflected in income statement.