The statement of Cash Flows

 The Statement of Cash Flows

You must have heard of Income statement (Profit and loss account), the statement of Assets and liabilities ( Balance sheet) and the statement stockholders' equity.

Each of this statement is useful in it's own specific ways. The balance sheet show at glance how management had utilised the organization resources in Assets and how those assets are financed by owners equity and liabilities. The income statement on the other hand report how much net income a firm earned during the accounting period under review. The third being a statement of stockholders' equity shows changes in the status of the ownership of a business during the accounting period, including the cumulative income retained in the business.

These financial statements are useful, but there are important questions that they do not answered. The questions are: 

1. Does the business generate enough money to pay it's dividends?

2. If a company make loss during the year does it generate enough money during the year to pay its liabilities?

3. What new financing and investing activities did the company engaged in during the year.

4. In what new assets did the company invest this year?

5. If liabilities were increase or reduced during the year how were they increase or reduced?

6 Are shares issued during the year, if yes, how are they invested, i.e how did the company utilised the proceeds from sales of such shares. These are the basic questions the statement of Cash Flows. What then is cash flows statement.

The cash flows statement explains the net increase or decrease in cash in an accounting period. It shows the effect on cash of operating, investing and  financing activities for an accounting period.

The main purpose of Cash Flows statement is to provide information about a company's cash receipt and  payments during an accounting period.

The secondary purpose is to provide information about a company operating, investing and financing activities during the accounting period. 

In the cash flow statement all transactions affecting cash are summarized.

The statement classifies cash received and payments  into three categories which are:

1. Operating Activities: this is made up of activities that determine the net income for the period, included in this section as cash inflows are cash receipts received from customer for goods and services, interest and dividends received on loan and investments. While cash outflows include cash payment for wages goods and services, interest, and taxes applied to pay employees, suppliers government agencies and others. In effect the income statement is changed from accural to cash basis.

2. Investing Activities: this section deals with aquiring and disposal of long term assets, marketable securities other than cash equivalents and the making and collecting of loans.

3. Financing activities: this section of the statement deals with obtaining or returning resources from equity owner of the company and. Providing them with return s in their investments. The second section of this unit deals with the resources from creditors( debenture holders) and repaying the amount borrowed or the  otherwise settling the obligation.

The cash follow statement shows the effect on cash of operating, investing and financing activities of a company in an accounting year.

Thanks for your time reading.


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