Question

A household functions like a small business. In both the household and business settings, the importance of stable cash flow cannot be emphasized enough. Households and businesses must maintain good cash flow to meet their continued obligations should something happen or if there is an economic downturn. Planning for both short- and long-term cash needs is important to both the household entity and the business entity.

Of the four primary financial statements used in accounting, managers often indicate that the Statement of Cash Flows is the most beneficial statement, in their opinion. Why do you suppose they believe this particular statement to be so important? (5 points)

Answer 1

Cashflow Statement:

Cashflow statement is the one that measures the liquidity or the inflows and outflows of cash in a business for any given period of time.It is the statement that reflect upon the cash account of the businenss.All sales are the part of companies revenues and all expenses cash outflow. The statement helps managers to understand the level of liquidity in business at certain time period and accordingly plan for future operating obligations.

Key characteristics of Cashflow Statement:

1. It represents the cash account of the business.
2. It has both opening and closing balance.
3. It reflects the usage of money in the operating activities.
4. It measures companies liquidity position at agiven period of time.
5. It is a findamental concept of evaluating companies working capital.
6. It affects the increase or decrease in balance sheet items.
7. Cashflow statement is reperesented by three activities- operating activities, investing activities and financingg activities.