Question

In an approximately 500-word response, address the following issues/questions:

Cash is the lifeblood of any business, and without it survival is very unlikely.

• Do you agree or disagree?
• Explain what information a statement of cash flows provides to supplement a statement of financial position and an income statement.
• Why is there still some controversy surrounding published statements of cash flows?
• How important are such statements in terms of the financial reporting requirements within YOUR country?

Answer 1

Cash is the lifeblood of any business. I agree with this statement and without it the survival of any business becomes extremely difficult. In common terms cash is addressed as the king of any business.

A very important fact and truth is that the existence of cash in any business puts the business in a strong and relatively stable position as the organisation has a better purchasing power in its hands. If the organisation has cash in its hand then in a situation where it has borrowed funds it is in a better of position as it gives support to the organisation as it can safely avoid any kind of defaults in loan repayments and foreclosures that happen in the normal functioning.

Having a positive cash flow means that the organisation is in a position to be able to generate and utilize its cash effectively.

The income statement are prepared by the organisations on accrual basis and therefore they report the income and revenue even if the collection of the revenue has happened and the disclosure of the expenses even when the payment has not been made for the expenses that had been incurred in the reporting period . Therefore the cash flow statements have successfully integrated all the information that is not available from the income statement

The controversy surrounding cash flow statements is that it is not always true and factual as many a times it is manipulated by the accountants by presenting a better position that it is in in order to be able to impress the investors.. many a times the intent to manipulate the cash flow statements is in order to get a higher credit rating and in the bargain get a lower and better interest rate and also organisations in divert non operating fund into the normal operations. Since working capital is responsible for cash flow, it is also adversely manipulated to show favourable accounts receivables,