Discuss why the statement of cash flows represents an important tool for the financial statement user.

Discuss why the statement of cash flows represents an important tool for the financial statement user. Why is balance important between different financing decisions (e.g. stock issuance versus debt issuance)

Expert Solution

Statement of Cash Flows is an important tool which is used by financial statement users because cash flow statement actually tells the amount of cash that has come in or has been paid out during a specified period of time. Cash Flows represents the revenue that has come in and the expenses that have been paid out.

This statement is important to the investors because it tell them the actual cash position of the company and the amount of funds the company has with it to pay off its current liabilities which are due in the coming 1 year. Cash flow occurs basically through 3 different activities which are 'Operating Activities' , 'Investing Activities' and 'Financing Activities'.

All these three activities represent the total amount of cash that has come in the company and the amount that has gone out. Cash inflows can be in form of funds raised from issue of equity shares and cash outflows can be in form of debt paid off to creditors.

This helps in determining the financial health of the company whether it is capable of paying of it's debt and the actual cash reserves that the company has at all the times to keep the flow of operations smoothly going on. Therefore statement of cash flows is of very importance to the financial users.

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