Question

Define objective of the Statement of Cash Flows and the purpose of it for financial statements users (i.e., what should it help financial statements users do). Include the relevant citations from the FASB codification

Answer 1

Objectives of statements of cash flow

• Ensuring future positive cash flow of particular concern.
• Ensuring the capacity of an organization to pay a dividend.
• Identifying non-cash items ensuring cash income and expenses of a concern.
• Comparing various items of the current year with those of last
• Ensuring future positive cash flow of particular concern.
• Ensuring the capacity of an organization to pay a dividend.
• Identifying non-cash items ensuring cash income and expenses of a concern.
• Comparing various items of the current year with those of last
• In decision making process

The purpose of financial statement users

A cash flow statement is a valuable measure of strength, profitability, and of the long-term future outlook for a company. The CFS can help determine whether a company has enough liquidity or cash to pay its expenses. A company can use a cash flow statement to predict future cash flow, which helps with matters of budgeting.

For investors, the cash flow statement reflects a company's financial health since typically the more cash that's available for business operations, the better. However, this is not a hard and fast rule. Sometimes a negative cash flow results from a company's growth strategy in the form of expanding its operations.

By studying the cash flow statement, an investor can get a clear picture of how much cash a company generates and gain a solid understanding of the financial well being of a company