Question

In: Accounting

Team, what is communicated on the face of the statement of cash flows and related disclosures?...

Team, what is communicated on the face of the statement of cash flows and related disclosures? Why might this be important to an investor or creditor? Brandy

Solutions

Expert Solution

General Purpose Financial Statements include
a. Balance Sheet / Posistion Statement which depicts the status of business i.e., assets and liabilities at a point of time.
b. Income Statement which shows the performance of business i.e., profit or loss for the period.

Book-keping and accounting is done on accrual basis of accounting.
Because of accrual basis, the actual cash receipts and payments cannot be traced from the general purpose financial statements.
Hence, for the better understanding of cash flow in and out of business entity, cash flow statement is being presented.
Thus, cash flow stataemnt presents movement of cash.

There are two methods of disclosure of Cash Flow Statement:
1. Direct Method
2. Indirect Method

Under direct method, cash flow statement is presented as Sources and Application of Funds during the year.
Cash inflow from every source (ledger wise) is presented under Sources.
Cash outflow for every application (ledger wise) is presented underr Applications.

Under Indirect method, cash flow statement presents the movement of cash during the year resulting from operating, investing and financing activities of the company.
In this method, profit before tax is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments and item of income or expenses associated with investing or financing cash flows.

Thus, details communicated on face of Cash flow statement is determined by the method under which cash flow statement is presented.
Under direct method, Sources (gross cash receipts) and Applications (gross cash payments) are presented as a whole of business for the year.
Under indirect method, cash inflows and outflows are catagorised into operating activities, investing activities and financing activities.

Associated Discclosures for cash flow statement prescribed under accounting standards are:
1. significant cash and cash equivalents held by business entity that are not available for use.
2. amount of undrawn balance in borrowing facility available for future operating activities.

Users of financial statements can understand how the enterprise generates and uses cash and cash equivalents.
A potential investor or creditor will analyse net cash flows through operations exceeds net cash flows from selling assets or borrowing money. This is because selling assets or borrowing money can never be construed as a continuing event, such as bringing in cash from selling goods or services. Thus, indirect method is most popularly used to present cash flow statement.

Uses of Cash Flow statement:
Investor
: An investor wants to make sure the entity has enough cash flow to pay an adequate return on investment. In other words, investor expects getting a cash dividend. Also important is using the statement of cash flows to evaluate how well the company is managing its cash because investors may eventually sell their shares of stock. If the company mismanages its cash to such a point that it goes out of business, there won’t be any buyers for the company’s stock — the stock may be worthless.

Creditor: The creditor is interest in company's liquity and has sound cash management. After all, in addition to interest expenses, the creditor wants to make sure it also gets paid back the principal portion of the loan. It’s never a good sign if a business is paying back debt by assuming more debt or issuing more equity.


Related Solutions

PREPARE necessary disclosures, including disclosures about noncash financing and investing activities for Statement of Cash Flows!​...
PREPARE necessary disclosures, including disclosures about noncash financing and investing activities for Statement of Cash Flows!​ Smart Construction Company Statement of Cash Flows For Year Ended June 30, 2017 Operating Activities:      Net Income $       124,780      Adjustments for noncash income items: Depreciation Expenses $           3,000 Loss on Sale of Building $           1,500 Amortization Discount on Bond $                45 Bad Debt $           3,500 Gain on Conversion of Preferred Stock $         (4,000) Gain on Repayment of Note Payable $         (1,000) Shared...
How is a statement of cash flows related to other financial statements?
How is a statement of cash flows related to other financial statements?
Statement of Cash Flows The Statement of Cash Flows (also referred to as the cash flow...
Statement of Cash Flows The Statement of Cash Flows (also referred to as the cash flow statement) is one of the three key financial statements that report the cash generated and spent during a specific period of time (e.g., a month, quarter, or year). The statement of cash flows acts as a bridge between the income statement and balance sheet by showing how money moved in and out of the business. Three Sections of the Statement of Cash Flows: Operating...
P22-5- Statement of Cash Flows, Indirect Method, Complex Accounts, Disclosures. The Khan Group provided its balance...
P22-5- Statement of Cash Flows, Indirect Method, Complex Accounts, Disclosures. The Khan Group provided its balance sheet and income statement as of December 31 of the current year. The Khan Group Balance Sheets At December 31 Assets Current Year Prior Year Current Assets Cash Trading debit Investments Accounts receivable- net Merchandises Inventory       Total Current Assets Noncurrent Assets Investments in Affiliate Companies Property, Plant, and Equipment- net Intangible Assets- net      Total Noncurrent Assets Total Assets     Liabilities Current Liabilities...
Alternative Treatments of Items of the Statement of Cash Flows The statement of cash flows is...
Alternative Treatments of Items of the Statement of Cash Flows The statement of cash flows is intended to provide information about the investing, financing, and operating activities of an enterprise during an accounting period. In a statement of cash flows, cash inflows and outflows for interest expense, interest revenue, and dividend revenue and payments to the government are considered operating activities. Required: a. Do you believe that cash inflows and outflows associated with nonoperating items, such as interest expense, interest...
WHAT IS A STATEMENT OF CASH FLOWS? WHEN IS THE STATEMENT PREPARED? WHAT IS THE PURPOSE...
WHAT IS A STATEMENT OF CASH FLOWS? WHEN IS THE STATEMENT PREPARED? WHAT IS THE PURPOSE OF THE STATEMENT? NAME THREE ACTIVITIES LISTED UNTER THE STATTEMENT. FOR EACH ACTIVITY, WRITE ANY TWO CASH FLOWS THAT EITHER ARE ADDED OR SUBTRACTED. DETAIL WHETHER IT IS AN ADDITION OR SUBTRACTION.
1) What is the purpose of Statement of Cash Flows? 2) Why do we need Statement of Cash Flows?
  1) What is the purpose of Statement of Cash Flows? 2) Why do we need Statement of Cash Flows? 3)Statement of Cash Flows tracks net changes in cash flow. Transactions are grouped into 3 categories, Operating, Financing and Investing. Provide one sample transaction for Financial Activity Cash Inflow. (i.e. borrow $5000 from the bank) Provide one sample transaction for Investing Activity Cash Outflow. (i.e. purchase a truck) 4) Companies prefer the Indirect Method for Operating activity. What is the...
The statement of cash flows
Question:The statement of cash flows classifies all cash inflows and outflows into one of the three categories shown below and lettered from a through c. In addition, certain transactions that do not involve cash are reported in the statement as noncash investing and financing activities, labeled d.a. Operating activitiesb. Investing activitiesc. Financing activitiesd. Noncash investing and financing activitiesRequired:For each of the following transactions, use the letters above to indicate the appropriate classification category.1. ____Purchase of equipment for cash.2. ____Payment of...
What are the three categories of cash flows on the cash flow statement?
What are the three categories of cash flows on the cash flow statement?
"Statement of Cash Flows" A Statement of Cash Flows is often one of the least used...
"Statement of Cash Flows" A Statement of Cash Flows is often one of the least used and understood of the key Financial Statements. However, it is a critical report to use when evaluating or analyzing a company. Showing where a company is receiving and using its cash - through Operations, Investing, and Financing - this report can be used to help evaluate liquidity, solvency, and financial flexibility. Analyze the key sections of the Statement of Cash Flows: Cash from Operations,...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT