Chapter 6A, Problem 1RQ

To determine

Explain the purposes of the statement of cash flows.

Explanation of Solution

Statement of cash flows: Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Purpose of the statement of cash flows:

• The primary purpose of the statement of cash flows is to provide information about the cash inflows and cash outflows of an organization.
• To determine the ability of the business to pay dividend and settle debts.
• Statement of cash flows distinguishes among the operating activities, investing activities and financing activities.
• Cash flows from operating activity provide information which is helpful in estimating future profitability, liquidity, and long term solvency.