Question

1. What is the purpose of a statement of cash flows? Please explain in your own words how the statement of cash flow can be helpful to a business.
2. What are the (3) major sections on a statement of cash flows, and what type of cash inflows and outflows should be included in each of these three sections?
3. Assume that a company repays a $300,000 loan from its bank, and then later in the same year they borrow another $500,000. In what section does this transaction belong, and what dollar amount(s) appear on the statement of cash flows?

Answer 1

Cash flow Statements:

The cash flow statements are an inevitable part of the financial statements of an entity. The cash flow statements show the cash generation and spending pattern of the entity. It takes into consideration the inflow and outflow of the cash and cash equivalents pertaining to the entity.

The Components of the Cash Flow Statements:

The major components of the cash flow statements are :

1. Cash flow from Operating Activities: The calculation of cash flows from operating activities have two methods namely direct method and indirect method

a. As per direct method the items taken into calculation are the receipts from customers , Payments to suppliers , cash paid out or received for administrative or operative purposes , in short it can be said that all cash inflows and outflows pertaining to the direct business operations

b  As per indirect method the items taken into calculation are the net profit from which the income of non cash nature is deducted and the expenses of non cash nature is added. The changes in the working capital Is taken into account

• The increase in current liabilities and decrease in current assets are added
• The decrease in current liabilities and increase in current assets are reduced

2. Cash flow from Investing Activities:

This takes into consideration the purchase and sale of assets , investments for example purchase of equipment will be cash outflow from investing where as sale of investments will be cash inflow from investing

This section also included and loans to from suppliers and customers.

3. Cash flow from Financing Activities:

The changes regarding capital payments and receipts such as issue of share capital, redemption of debentures, payment of dividend and interest , repayment of debt , issue of debt etc.

This mainly deals with changes in capital.

The repayment of loan $300,000 is cash outflow from financing activities whereas borrowing of $ 500,000 is a cash inflow from financing activities

Therefore the net cash flow from financing activities equals $ 200,000