Question

1. What are the purposes of the Statement of Cash Flows?

2. In your own words, define the three sections of the cash flow statement—operating, investing, and financing.

Answer 1

Answer:- 1)-The statement of cash flows: The primary purpose of the statement of cash flows is to provide information related to the cash receipts, cash payments, and the net change in cash resulting from the operating, investing, and financing activities of a company during the period and also showing the operating, investing, and financing activities of an entity.

2)-Explanation:- Cash flows are classified as operating, investing, or financing activities on the statement of cash flows, depending on the nature of the transaction. Each of these three classifications is defined as follows.

a)-Operating activities include cash activities related to net income. For example, cash generated from the sale of goods (revenue) and cash paid for merchandise (expense) are operating activities because revenues and expenses are included in net income.

b)-Investing activities include cash activities related to noncurrent assets. Noncurrent assets include (a) long-term investments; (b) property, plant, and equipment; and (c) the principal amount of loans made to other entities. For example, cash generated from the sale of land and cash paid for an investment in another company are included in this category. (Note that interest received from loans is included in operating activities.)

c)-Financing activities include cash activities related to noncurrent liabilities and owners’ equity. Noncurrent liabilities and owners’ equity items include (a) the principal amount of long-term debt, (b) stock sales and repurchases, and (c) dividend payments. (Note that interest paid on long-term debt is included in operating activities.)