Question

3.You are the accountant for a small manufacturing firm. Your company is privately held, so there is no current requirement to issue financial statements using GAAP. You were hired four years ago, and at that time you instituted a cash budgeting system. Presently, you prepare anincome statement, statement of retained earnings, balance sheet and departmental budgets. Jake Griffith, the company's president, has asked whether a statement of cash flows would also be useful.Required: Prepare a short memorandum to the president indicating whether you believe such an addition to the financial statements to be useful. Include in your memo the benefits that might be expected from a statement of cash flows and whether those are different from the benefits of income statement.

Answer 1

Inclusion of cash flow in financial statement is very beneficial for the company. The motive behind preparation of cash flow statement is to check the cash availability of the business during the period as well as the flow of cash during the period under the various activities. As we understand cash is essential for the smooth running of the business , so it helps in undestanding cash requirements and their availability.

Further, Cash flow statement is different form income statement in the sense that income statement include any expense which has been incurred during the period irrespective of cash has been paid or not but cash flow includes only cash transaction. Difference lies in the fact that motive of cash flow statement is to understand the flow of cash and of income statement is to calculate the income/ (loss) during the period.