Question

1. What is the cash flow statement and why is it an important consideration to both the management, investors and creditors?

2. What is important difference about the purchase of plant and equipment in comparison to the purchase of inventory and other assets with the same characteristics?

Answer 1

1.The statement of cash flows, or the cash flow statement, is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company.

The cash flow statement (CFS) measures how well a company manages its cash position, meaning how well the company generates cash to pay its debt obligations and fund its operating expenses. The cash flow statement complements the balance sheet and income statement and is a mandatory part of a company's financial reports since 1987.

The statement of cash flows is very important to investors because it shows how much actual cash a company has generated. The income statement, on the other hand, often includes noncash revenues or expenses, which the statement of cash flows excludes.

The most significant reason is to provide owners and managers insight into the company's cash position. This knowledge better equips management to make informed decisions about regular business operations, the need for further investment in the business, and capital from equity or debt partners.

This statement is useful for decision making because it provides relevant and reliable information for predicting cash flows. The cash flow statement is an important analytical tool that the trade creditor can use to determine if a customer is able to generate sufficient cash to meet its trade obligations.

2. the purchase of plant and machinery is capitalisation of Amount spent for a long period that is purchase of fixed asset and hence depreciation can be provided over the fixed asset whereas purchase of inventory or other asset are current asset that is this assets are fluctuating over a regular basis of time.