Question

a) Identify the three classifications of the statement of cash flows. Why are these classifications important? b) Fabulous Ltd provides you with the following information: Sales for the year $800000 Discounts provided during the year to customers for early payment $20 000 Doubtful debts expense for the year $10 000 Opening balance of accounts receivable $180 000 Closing balance of accounts receivable $160 000 Opening balance of the allowance for doubtful debts $18 000 Closing balance of the allowance for doubtful debts $16 000

Answer 1

a) Cash flow statement is a statement which shows inflows and outflows of cash and cash equivalents in an enterprise during a specified period of time. There are three classifications of the statement of cash flows.The type of classifictions and the importance of these classifications are shown as follows:-

i) Operating Activities: Operating activities are the principal revenue producing activities of the enterprise. The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise to pay dividends, repay loans and make investments.

ii) Investing Activities: Investing activities are the acquisition and disposal of long term assets such as land, buildings, plant and machinery etc. It is important to make seperate disclosure of cash flows arising from investing activities because the cash flows represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.

iii) Financing Activities: Financing activities are activities that result in changes in the size and composition of the owner's capital and borrowings of the enterpise. The seperate disclosure of cash flows from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds to the enterprise.