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.
Which one of the following is a source of cash?
A. decrease in accounts receivable
B. decrease in accounts payable
C. decrease in common stock
D. increase in inventory
- Decrease in accounts payable: When the current liabilities of the company decreases, it means that the time taken by the company to pay its suppliers would reduce which means that it is settling its suppliers fast. This can reduce the amount of current liabilities in the balance sheet. Reduction in CL is a use of cash for the company.
- Some items that are considered to be use of cash are dividends paid & decrease in stock. Hence decrease in common stock i means that the company is giving retirement to its own assets as a result of which assets of the company decrease which is a use of cash for the company. On the other hand increase in common stock is a source of cash.
- Increase in inventory is a use of cash because increase in inventory indicates that the company has purchased additional goods than it has sold. So purchase of goods requires cash for the company.
- A decrease in the accounts receivables means that the company has received more cash from its customers. Hence entry of cash inside the organization is a source of the company.
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