Question

Undeniably, profitability is the ultimate goal of companies and readers of a company’s financial statements are very much interested in the reported profit figure. The profit figure is achieved by the preparation of the statement of profit or loss and the statement of financial position. If the foregoing is the

case, why then bother about the statement of cash flows?

Answer 1

Cash Flows Statement: Cash Flows Statement is the statement which shows the cash inflows and the cash outflows of the business form its various activities such as Operating Activities, Investing Activities and Financing Activities. The statement shows how much of the cash came in and went out of the company. The Statement of the financial position may show the final amount of cash with the business but does not provides the details of how much the cash received and spent which can be shown in the statement of cashflows. The Income statement may be similar to that of the Cashflows statement but the difference is the accrual concept which is ignored in the cashflows statement. It records only the transactions which involves cash and ignores the concept of accrual. The income statement may contain the non cash revenues and expense which is not there in the cashflows statements and hence it provides the true values of the cash flows.

Cashflows statement is very important for the investors through which they can know the cashflows in and out of the business.Generating the profit is not the only thing required by the business but the ability to generate the cash is also very important for the company because most of the companies shows huge profits in its income statement but doesn't have sufficient funds to run the normal operations of the business. so, it is very important for the company to prepare the financial statements to know the ability of generating cash by the company.