Explain the purpose of the Statement of Cash Flows
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Explain the purpose of the Statement of Cash Flows
The primary purpose Of the statement Of cash flows is to provide information about cash receipts, cash payments, and the net change in cash resulting from the operating, investing, and financing activities Of a company during the period. a. The Statement Of Flows identifies cash flows as being generated from three sources:
i. Operating Activities:
1. activities include the cash effects of all transactions that create revenues and expenses and thus enter into the determination Of net income. ln general Operating activities are those activities that the business was created to perform and also includes interest from any source and any Other type or revenue-producing (Other revenue) types of activity i. Operating activities are related to operations of the entity ii. Cash from operations is generally considered to the best measure Of whether a company can generate sufficient cash to continue as a going concern and to expand.
Il. Investing Activities:
1. include all those activities involve in long-term uses or sources Of cash. i. purchasing and disposing Of investments and productive long-lived assets using cash and ii. lending money and collecting the i. Note that any interest revenue or expenses from these activities are operating activities
lll. Financing Activities:
1. Include obtaining cash from issuing debt and the amounts borrowed and (b) obtaining cash from stockholders and them dividends i. Note that Dividends received or paid are operating activities
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