Question

3.1. Define the statement of Cash Flows.

                          
3.2. Elaborate on the purpose of the statement of cash flows

3.3. Elaborate on the 3 major sections of the statement of cash flow

3.4. Give an example of a statement of cash flow

Answer 1

3.1

The statement of cash flows, or the cash flow statement, is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company. The cash flow statement (CFS) measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses. The cash flow statement complements the balance sheet and income statement and is a mandatory part of a company's financial reports.

3.2

The cash flow statement is intended to:

• Provide information on a firm’s liquidity and solvency and its ability to change cash flows in future circumstances provide additional information for evaluating changes in assets, liabilities, and equity;
• Improve the comparability of different firms’ operating performance by eliminating the effects of different accounting methods; and
• Indicate the amount, timing, and probability of future cash flows.

3.3

The Statement of Cash Flows (SFAS-95) identifies cash flows as being generated from three section :

• Operating activities include the production, sales, and delivery of the company’s product as well as collecting payments from its customers. This could include purchasing raw materials, building inventory, advertising, and shipping the product.
• Investing activities are purchases or sales of assets (land, building, equipment, marketable securities, etc.), loans made to suppliers or received from customers, and payments related to mergers and acquisitions.
• Financing activities include the inflow of cash from investors, such as banks and shareholders and the outflow of cash to shareholders as dividends as the company generates income. Other activities that impact the long-term liabilities and equity of the company are also listed in the financing activities section of the cash flow statement.

3.4 Example of cash flow ( Direct method)