Statement of Cash Flows Essay

718 Words Nov 25th, 2010 3 Pages

Statement of Cash Flows: Purpose and Contained Information
Veronica Jackson
University of Phoenix
November 29, 2010

Statement of Cash Flows

The statement of cash flows serves multiple purposes. One is providing information about a company’s cash payments and receipts during a given period. A second purpose is to provide cash-basis information about the company’s operating, financing, and investing activities. Its format reconciles the beginning and ending cash balances for the period (Kieso, Weygandt & Warfield, 2007). The operating activities involve the cash effects of transactions that enter into the determination of net income, such as cash payments to employers and suppliers
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Likewise, a gain or loss on the payment (extinguishment) of debt is generally part of the cash outflow related to the repayment of the amount borrowed. It therefore is a financing activity. In addition, the statement of cash flows provides information to help investors, creditors, and others assess the following: The entity’s ability to generate future cash flows, The entity’s ability to pay dividends and meet obligations, The reasons for the difference between net income and net cash flow from operating activities, and the cash and noncash investing and financing transactions during the period. By examining relationships between items such as sales and net cash flow from operating activities, or net cash flow from operating activities and increases or decreases in cash, it is possible to better predict the future cash flows than is possible using accrual-basis data alone. Simply put, cash is essential.
A primary objective of financial reporting is to provide information with which to predict the amounts, timing, and uncertainty of future cash flows. Without adequate cash, a company cannot pay employees, acquire equipment, pay out dividends, or settle debts. A statement of cash flows indicates where the company’s cash comes from and how the company uses its cash. Employees, stockholders, creditors, and customers should be particularly interested in this statement, because it alone shows the flows

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