Cash Flow Statement
Definition
and Explanation of Cash flow statement:
The purpose of
the statement of cash flows is to highlight the major activities that directly
and indirectly impact cash flows and hence affect the overall cash balance.
Managers focus on cash for a very good reason―without sufficient cash balance at
the right time, a company may miss golden opportunities or may even fall into
bankruptcy.
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Understanding Cash Flow
Statement-format and sections:
Three major financial statements are ordinarily required for external reports―an
income statement, a balance sheet, and a statement of cash flows. The
purpose of the statement of cash flow is to highlight the major activities
that directly and indirectly impact cash flows and hence affect the overall
cash balance. Managers focus on cash for a very good reason―without
sufficient cash balance at the right time, a company may miss golden
opportunities or may even fall into bankruptcy.
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Cash Flow Statement Example-direct and indirect method:
Unlike the major financial statements, cash flow statement is not
prepared from the adjusted trial balance. The information to prepare this
statement usually comes from three sources:
-
Comparative balance sheets provide the amount of the changes
in assets, liabilities, and equities from the beginning to the end of the
period.
-
Current income statement data help the reader determine the
amount of cash provided by or used by operations during the period.
-
Selected transaction data from the general ledger provide
additional detailed information needed to determine how cash was provided or
used during the period
Preparing the cash flow statement from the data sources above involves
three major steps: Step 1. Determine the change in cash:
This procedure is straight forward because the difference between the
beginning and the ending cash balance can be easily computed from an
examination of the comparative balance sheet.
Step 2. Determine the net
cash flow from operating activities:
This procedure is complex. It involves analyzing not only the current year's
income statement but also comparative balance sheets and selected
transitions data. Step 3. Determine net cash flows from investing and
financing activities:
All other changes in the balance sheet accounts must be analyzed to
determine their effects on cash.
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