What is the purpose of a statement of cash flows? How does it differ from a balance sheet and an income statement? 2. Difference between operating activities, investing activities, and financing activities. 3. What is the purpose of a free cash flow analysis? 4. What are some of the techniques of disclosure for the balance sheet? 5. What is a “Summary of Significant Accounting Policies”?
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.
1. What is the purpose of a statement of
2. Difference between operating activities, investing activities, and financing activities.
3. What is the purpose of a
4. What are some of the techniques of disclosure for the balance sheet?
5. What is a “Summary of Significant Accounting Policies”?
Solution:-1
What is the purpose of a statement of cash flows:-
The statement of cash flows (SCF) is an important financial statement that shows the details of the company’s cash flows for an accounting period. It tells us how much cash has been received or paid by a business during its accounting period.
The purpose of the cash flow statements to identify the major cash flows occurring during the same period of time as the company's income statement and between the related balance sheets.
How does it differ from a balance sheet and an income statement:-
A cash flow statement tells you about the overall flow of money into and out of a company. The statement is divided into three sections — operations, investing, and financing.
Balance sheet can tell you where a company stands financially, and is separated into three main sections — assets, liabilities, and equity. A company's assets must be equal to (or "balance" out) its liabilities plus equity
The income statement measures a company's financial performance such as revenues, expenses, profits, or losses over a specific period of time. This financial document is sometimes called a statement of financial performance.
An income statement shows whether a company made a profit, and a cash flow statement shows whether a company generated cash.
Solution:-2
Difference between operating activities, investing activities, and financing activities:-
Cash flows from operating activities arise from the activities a business uses to produce net income. For example, operating cash flows include cash sources from sales and cash used to purchase inventory and to pay for operating expenses such as salaries and utilities. Operating cash flows also include cash flows from interest and dividend revenue interest expense, and income tax.
Cash flows from investing activities are cash business transactions related to a business’ investments in long-term assets. They can usually be identified from changes in the Fixed Assets section of the long-term assets section of the balance sheet. Some examples of investing cash flows are payments for the purchase of land, buildings, and equipments.
Cash flows from financing activities are cash transactions related to the business raising money from debt or stock, or repaying that debt. They can be identified from changes in long-term liabilities and equity. Examples of financing cash flows include cash proceeds from issuance of debt instruments such as notes or bonds payable, cash proceeds from issuance of capital stock, cash payments for dividend distributions etc
Solution:-3
What is the purpose of a free cash flow analysis:-
Free cash flow is an important measurement since it shows how efficient a company is at generating cash free cash flow (FCF) measures a company’s financial performance. It shows the cash that a company can produce after deducting the purchase of assets such as property, equipment, and other major investments from its operating cash flow.
Solution:-4
Techniques of disclosure for the balance sheet:-
Balance sheet became even more important than the income statement to stakeholders: the management, investors, creditor and regulators. Not only about balance sheet became extremely important. In addition to it, necessary informative disclosure is required by the accounting standard because, without the information they provide, the financial statements would be misleading.
- Notes to Financial Statements
- Supporting Schedules
- Accounting Policies
- Parenthetical Explanations
- Comparative statements
- Valuations and explanations etc.
Solution:-5
What is a “Summary of Significant Accounting Policies”:-
The summary of significant accounting policies is a section of the footnotes that accompany an entity's financial statements, describing the key policies being followed by the accounting department. The disclosure of accounting policies is particularly important in situations where an organization chooses to follow policies that depart from the policies generally used within its industry. By perusing these policies, the investment community will have a better understanding of how the accounting policies used could alter the reported financial results and financial position of an entity.
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