BUAD 803: Principles of Accounting Registration Number: DP17MBA0967The cash flow statement is a key accounting financial statement. In the cash flow statement sensitive information is shared to investors, shareholders, debtors and other business associates. The cash flow statement exposes the position and financial strength of a business.
The cash flow statement, income statement and balance sheet are the three main financial statements. A cash flow statement relates monetary flow within an enterprise. These cash flow operations are divided into three, namely the operating activities, investing activities and financing activities. Operating activities consist of revenue generating activities inclusive of the effects of cash transactions which determine net profit or loss. Investing activities involves asset related transactions like selling and acquisition of fixed assets in buildings or equipment’s including shares, as long as resale is excluded. Financing activities emphasize a shift or formation in owner’s capital or credit consisting of contributions, distributions, purchase and stock issuance; and debt. The direct method or the indirect method may be utilized when preparing the statement of cash flow.
The direct method is usually preferred by standard accounting bodies like the Financial Accounting Standards Board in America and the Nigeria Accounting Standard Board. Nevertheless, the indirect method is maintained by most companies for preparation of the cash flow statements, starting with the net income of the operating activities and adjustments for cash provision in the operating activities. The indispensability of the cash flow statement lies in the extent to which the company and its investors can deduce the discrepancies in the level of cash inflows and outflows from both internal and external sources. Though the income statement will shows loan servicing activities and the balance sheet depicits debt, it is only the cash flow statement that signifies the cost of such loans. Sales and profit will be recorded by the income statement, but it is the cash flow statement that reveals weather sales generated are sufficient to meet expenditures. Partly the cash flow statement is important to the firm when prioritizing on the internal sources of cash as opposed to the external sources. The cash flow analyses and management serve multiple purposes of which the very significance is to give the proprietors and management an eye into the company’s financial status.
Better informed decisions can be made with this knowledge in the daily operations of the company, in future investment needs, and capital required for debt or equity investors. Business of all sizes are challenged managing cash, while the cash flow statement is not the only method for cash flow monitoring, it forms a basic element in reporting statements and should not be overlooked by finance practitioners. Please find attached below the Cash Flow Statement.