Chapter 16, Problem 1QC

To determine

Cash Flow Statements:

Cash flow statement is an important tool of management information and liquidity planning. It is prepared to explain the movement on cash. The statement is useful in planning use of cash in a short period of time. It helps the management to plan acquisition of fixed asset and other gainful uses of cash. The information in the cash flow statement is highly useful for internal as well as external users.

To indicate: The purpose of cash flow

Answer to Problem 1QC

Solution: a. evaluates management decisions

Explanation of Solution

Option a: The cash flow statement shows summarized details of the cash transactions in a period. It helps the management to take decisions regarding investing or utilizing cash and its equivalents in the firm. It also helps the management to figure out the reasons for inflow or outflow of cash and if needed, necessary measures can be taken to control or increase the same.

Option b: The ability to pay debts and dividends is determined using the financial statement of the firm. The cash flow statement shows only inflow and outflow of cash along with its reason. Hence, it cannot be considered as the purpose of preparing statement of cashflow.

Option c: Management can predict future cash flows on the basis of current and historic cash flow trends. Management uses NPV method to evaluate various investments. These trends are not available in the cash flow statement. Hence, it is not a purpose for preparing cashflow statement.

Option d: B and c part are incorrect. Hence, d is also incorrect.

Conclusion

The purpose of the cash flow statement is to help in evaluating managerial decisions.