Question

ANSWER ALL QUESTIONS...

(1) "Described the purpose of the Statement Of Cash Flows".

(2) "Identify the three (3) Sections of the Statement Of Cash Flows".

(3) "Describe briefly what type of transactions are included in each of the three (3) sections of the Statement Of Cash Flows ".

(4) "Discuss briefly the "Indirect Method" of the Operating Activities Section of the Statement Of Cash

        Flows".

Answer 1

• Answer 1

The main purpose(s) of the Statement of Cash Flows can be summarised below-

1. It helps user understands where the cash has gone and from where cash has been received.
2. It also classifies cash inflow and outflow into operating, financing and investing activities.
3. The Net Increases/Decreases in cash during a particular period of time concerned is also get to be known.
4. It facilitates understanding of financial statements of a corporation.

• Answer 2

The three Sections of Statement of Cash Flows are:

1. Cash Flows from Operating Activities
2. Cash Flows from Investing activities
3. Cash flow from Financing activities

• Answer 3

The type of transactions included in:

1. Operating Activities: Transactions that are concerned with normal working or operation of a company, like sales made, cash collected from receivables, payments to suppliers, increase or decrease in working capital. Mainly, it includes transactions that are related to Operations of a company.
2. Investing activities: Transactions that are of investment nature or related to investments and long term assets. These include purchase/sale of Assets including gain/loss on such transactions. Investment made in shares/securities etc also come under this category.
3. Financing activities: The transactions that are counted here are mainly concerned with from where the company getting its finances. These include issue of common stock, borrowings/repayment of bank loans, payment of dividends, etc.

• Answer 4

The Indirect Method of Operating Activities takes into account the Net Income appearing in income statement and reconciling it to operating profits earned in cash by applying indirect approach.

Under this, Net Income first is adjusted by adding or subtracting Non-Cash items like Depreciation expenses, Intangibles written Off, etc.

After that, changes in the working capitals are adjusted to the above Net Income. Here, following is done:

Decrease in Current Assets and Increase in Current Liabilities are ADDED, and
Increase in Current Assets and Decrease in Current Liabilities are DEDUCTED from above Net Income.

This gives us the Cash Flows from Operating Activities.