Statement of Cash Flows Essay

1213 Words Feb 28th, 2011 5 Pages
Statement of Cash Flows

STATEMENT OF CASH FLOWS 1
The Statement of Cash Flows is a very viable and helpful resource. Decision makers use the Statement of Cash Flows in many instances to assess the viability of a firm. Within the statement are many types of elements that are incorporated to create the complete Statement of Cash Flows. Also within the statement is what is known as the inflows and outflows. In some cases, activity notes may be incorporated to help complete such representations. To fully understand the Statement of Cash Flows one must know the definition of it and what it in fact means. The Statement of Cash Flows is a change statement summarizing the transactions that caused cash to change
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A good example of this is that depreciation is not really a cash expense. Depreciation is an amount that is deducted from the total value of an asset that has previously been accounted for. That is why it is added back into net sales for calculating cash flow. The only time income from an asset is accounted for in CFS calculations is when the asset is sold.
Also important to know is that changes in accounts receivable on the balance sheet from one accounting period to the next must also be reflected in cash flow. If accounts receivable decreases, this suggests that more cash has entered the company from
STATEMENT OF CASH FLOWS 4 customers paying off their credit accounts (the amount by which AR has decreased is then added to net sales). However, if accounts receivable increases from one accounting period to the next, the amount of the increase must be deducted from net sales. This is because, although the amounts represented in AR are revenue, they are not however cash.
If there is an increase in inventory, this indications that a company has spent more money to purchase more raw materials. If the inventory was paid with cash, the increase in the value of inventory is deducted from net sales. A decrease in inventory would be added to net sales. If inventory was purchased on credit, an increase in accounts

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