Question

Please describe the purpose of the Statement of Cash Flows and the interrelationship between the statement of cash flows and the other major financial statements we covered in this class. In your answer, please also address which financial statements should be created before the Statement of Cash Flows, if any, and which financial statements need to be completed after the Statement of Cash Flows, if any.

Answer 1

Statement of cash flow shows various sources and uses of cash and ultimately reveals the Cash balance in the hands of company at the end of the year. It serves the following purposes :-

1. Sources of Cash= Cash flow statement shows various sources of Cash of the organization which broadly includes Cash flow from operation, cash flow from investing activities like sale of fixed assets, investments etc., Cash flow from financing activities like issue of shares, issue of debenture, loan proceeds etc

2. Uses of Cash = it also tells us where the Cash has been consumed. There are various avenues where Cash can be spent which includes Cash flow from operation activities, cash flow from investing activities like purchase of fixed assets, purchase of investment, and Cash flow from financing activities like distribution of dividend. With the help of cash flow statement we can find where Cash has been spent this period.

3. Provides liquidity position = it also provides information about liquidity position of the company and how strong or weak it's liquidity positive is.

4. Serves to various organizations= various organizations wants statement of Cash flow of company for varied purpose. This it also serves their respective purposes.

Financial statements consists of income statement, balance sheet, Cash flow statement. All these financial statements are interrelated and interconnected with each other. Especially, Cash flow statement is interrelated to both income statement and balance sheet. As income statement finally showed Net income earned by the company during the period. That figure of Net income is used by the company is Cash flow statement prepared using indirect method. Also various other items that comes in income statement are also somewhere shown in statement of Cash flow. Cash flow from operating activities is calculated mainly with the help of income statement. Whereas Cash flow from investing activities and cash flow from financing activities is also calculated with the help of balance sheet. Thus, Cash flow statement is closely interrelated with these other financial statements.

It should be noted that statement of Cash flow takes various items and figures from income statement and balance sheet. Thus or should prepared only after the preparation of income statement and balance sheet.