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How is the Statement of Cash Flows organized and why is it an important consideration when making financial decisions?
Statement of Cash Flows
Statement of Cash Flows is an important financial statement used for monitoring the flow of funds into and out of an organization during a particular financial year. The statement will show the details of cash generated and spent during a particular period to which it is generated. The period for the preparation of the statement of cash shall be a quarter or a month also. The statement shall be prepared by showing data into three different categories namely operating activities, investing activities, and financing activities.
Operating activities include the major revenue-generating activities of an organization such as sales, purchases, and other expenses. The statement of cash flows shall be presented in two ways such as direct presentation and indirect presentation. In the case of direct presentation operating cash flows are presented as a list of cash flows and in the case of indirect presentation, the operating cash flows are presented in the form of reconciliation from profit to cash flow.
Investing activities include the investments made by an organization in non-current assets. It can include cash flows in connection with the buying and selling of properties, plants, financial assets, etc.
Financing activities include those activities that will result in the modification of the capital structure of an organization such as borrowing, repayment of loans, issuing or buying back of shares, etc. Payment of dividends of a company will also be treated as financing activity for the preparation of the statement of cash flow.
Importance of Statement of Cash Flows in financial decision making
The statement of cash flows will be helping an organization in the short term financial planning of an organization.It helps the businesses to keep a specific amont of liquid money for meeting contingencies. Along with that, it helps an organization in predicting cash flow for the short run. It also helps an organization in getting information regarding where money spends in the organization. It motivates an organization in collecting the receivables to improve the availability of cash. The statement of cash flows helps an organization in predicting future cash flows and it will be useful for taking precautions for maintaining the cash position of an organization. It helps in long term planning of an organization too especially in identifying the potential long term debts. Further, the statement of cas flows helps in knowing the optimum level of cash balance of an organization which will be helpful in avoiding excessive cash or shortage of cash. Moreover, the statement of cash flows helps in the analysis of the working capital of an organization.
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PLEASE Write at least 300 word response to this topic. THANK YOU! How is the Statement...
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