Question

The statement of cash flows is one of the most difficult and often unused financial statements. However, it can also be one of the most valuable for investors, creditors, and managers. Give an example of each of the sections of the cash flow statement and why you see it is important?

Answer 1

Cash flow statement give the information about the inflows and outflows of the cash regarding to an organisation.

It is the most difficult statement to draft and prepare among the financial statements because

It involves with three components those are

1. Cash flow from operating activities

2. Cash flow from financing activities

3. Cash flows from investing activities.

but this statement is very valuable to the investors and creditors because they get the information regarding for which purpose the cash is using by the organisation and through which source the organisation is generating cash inflows.

To understand this cash inflows and outflows to the users of financial statements every organisation prepare cash flow statement.

Examples of each of the section of cash flow statement

1. Cash flow from operating activities

A. Cash generated through sales

B. Cash paid for purchases

C. Cash paid for direct expenses like wages for the production

This activity is important due to this gives information about the primary activity of the organisation.

Every organisation has several types of sources of income but this section of cash flow statement shows the cash generated from primary activity of the organisation.

For example producing goods is primary activity for a manufacturing entity. This section shows cash generated from sale of those produced goods and also cash paid for direct expenses for production.

By above discussion we can say that cash flows from operating activities use information about net cash flows from primary activity of the organisation.

B. Cash flow from financing activities.

Every organisation have debts from banks of Financial institutions.

In return they need to pay interest and principal amount for every regular time intervals.

This section of cash flow statement gives the cash inflows and outflows from this type of activities.

the user of financial statements get a clarity about the expenses that was incurred for financing of that particular organisation.

C. Cash flow from investing activities

Every organisation has surplus cash reserves after entering all the expenses.

Those surplus cash was invested in short term and long term investments and those investments generate income in the form of interest or dividend.

this section of cash flow statement use information about cash inflows and outflows from these type of investments.

So the users of financial statements get information from this section is - what are the source of income other than primary activities of a particular organisation.

These are all the sections of the cash flow statement and importance of each section of cash flow statement.

These are all the information required to solve the above given question.

I hope, all the above mentioned information and explanations are useful and helpful to you

Thank you.