Question

Agree or Disagree and Why?

Learning objective:  Explain the need for the statement of cash flows, and identify the three types of business activities presented in a statement of cash flows.

The statement of cash flows is an important financial statement for a any business. Companies would want to know how the business is generating money. Tracking and recording transactions allows management to know how the cash is spent and where it comes from. In the statement of cash flows, all transactions from operating, investing, and financing activities are recorded. Operating activities records the cash flows related to the production and delivery of goods and services, such as, cash received from customers, wages paid to employees, and also cash received from interest and dividends are classified as cash inflows under operating activities. Investing activities are cash inflows and outflows related to the buying and selling of long-term assets, such as, collection from selling a building or equipment no longer in use, collection on long-term loan, and payments to buy debt or equity securities. Financing activities are cash flows on issuing and repurchasing stock, such as, reimbursing long term debts, and paying dividends to shareholders.

The statement of cash flows summarizes cash activities for the business. This statement is important when there is a difference between the amount of profit reported and the amount of net cash flow generated by operations. (Ch 13, Sofiane Naitsidenas )

Answer 1

I agree with this statement. A cash flow statement is very useful in short-term planning, a firm needs to have a sufficient amount of cash for meeting various business obligations like payment for expenses, taxes, purchase of fixed assets etc... It exhibits the changes of financial positions relating to operational activities, investing activities, and financial activities which enables the firm to determine the financial policy to be adopted in future.

Cash Flow Statement(CFS) is an important financial tool for the management to make an estimate relating to cash for the near future. Proper management of cash is possible if CFS is properly prepared. The management can prepare an estimate about the various inflows and outflows of cash and thus make reliable plans for the future.