Question

In a one- to two-page essay, consider the function and purpose of a statement of cash flows within a business organization. Describe the four steps used to develop a statement of cash flows. Within the analysis explain how managers use this financial information to better manage the daily operations of a company.

Be sure to illustrate the four steps by using a real-world business example. The business can be one you work at or one you are familiar with.

Provide at least two scholarly sources.

Answer 1

The primary purpose of the statement of cash flows is to provide information about cash receipts, cash
payments, and the net change in cash resulting from the operating, investing, and financing activities of a
company during the period.
a. The Statement of Cash Flows (SFAS-95) identifies cash flows as being generated from three
sources:
i. Operating Activities
1. Operating activities include the cash effects of all transactions that create
revenues and expenses and thus enter into the determination of net income.
i.In general Operating activities are those activities that the business was
created to perform and also includes interest from any source and any other
type or revenue producing (other revenue) types of activity
i. Operating activities is the most important category because it shows
the cash provided or used by company operations.
ii. Cash provided by operations is generally considered to be the best
measure of whether a company can generate sufficient cash to
continue as a going concern and to expand.
ii. Investing Activities
1. include all those activities involve in long-term uses or sources of cash.
i. purchasing and disposing of investments and productive long-lived assets using
cash and
ii.lending money and collecting the loans.
i. Note that any interest revenue or expenses from these activities are
operating activities
iii. Investing Activities
1. Include obtaining cash from issuing debt and repaying the amounts borrowed and (b)
obtaining cash from stockholders and paying them dividends
i.Note that Dividends received or paid are operating activities

B Activities involving cash are reported in a format that reconciles the beginning and ending cash

balances.

i. The statement of cash flows provides answers to the following important questions:

1. Where did the cash come from during the period?

2. What was the cash used for during the period?

3. What was the change in the cash balance during the period?

ii. The statement of cash flows also provides clues about whether dynamic companies will be

able to thrive and invest in new opportunities or whether a struggling company will survive or perish