Question

 

1) What is the purpose of Statement of Cash Flows?

2) Why do we need Statement of Cash Flows?

3)Statement of Cash Flows tracks net changes in cash flow. Transactions are grouped into 3 categories, Operating, Financing and Investing.

Provide one sample transaction for Financial Activity Cash Inflow. (i.e. borrow $5000 from the bank)

Provide one sample transaction for Investing Activity Cash Outflow. (i.e. purchase a truck)

4) Companies prefer the Indirect Method for Operating activity. What is the starting point?

Answer 1

1. Purpose of statement of cash flows -

The purpose of statement of cash flow is to present the record of cash inflows and cash outflows of the business to the users or stakeholders. In other words, record of cash receipts and cash payments for various activities of business, which are further classified in three categories, operating, investing and financing.

Another very important purpose of cash flow statement is that it gives information to the organization regarding the cash position, and form a base for decision regarding regarding managing cash flow.

2. We need statement of cash flows because it reveals about the actual cash generation of organization. It discloses how organization has spent cash. Income statement reflects the profits or losses position of company. Balance sheet reflects the position of assets and liabilities at the end of financial year. The track of cash flow can be monitored only through cash flow statement.

To make economical and financial decision, cash flow statement plays important role as it gives insight about the solvency of the organization.

3. Sample transaction for financial activity cash flow -

Purchase of treasury stock = ($10000)

Investing activity cash flow =

Proceeds from sale of property = $5000

4. Starting point of indirect method for operating activity is NET INCOME OR NET LOSS for the respective financial year.