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Financial statement: Financial statements are condensed summary of transactions communicated in the form of reports for the purpose of decision making. The financial statements reports, and shows the financial status of the business. The financial statements consist of the balance sheet, income statement, statement of retained earnings, and the cash flow statement.
Statement of cash flows: This statement reports all the cash transactions which are responsible for inflow and outflow of cash and result of these transactions is reported as ending balance of cash at the end of reported period.
To Explain: The need for an additional financial statement that reports the cash flows.
Explanation of Solution
The cash flow statement reports the actual cash inflow and outflow, which occurred during the accounting period. Though the cash flow affects the balances of the various accounts represented in the income statement and the balance sheet, the original cash transaction is not clear. This is accrual principle as the prepaid expenses, outstanding expenses, accrued income are all not shown by them.
Thus, preparing the cash flow statement gives a clear overview of all the expenses made and the cash received in the accounting period.
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