Statement of Cash Flows and The Purpose of Its Preparation

4/8/2020 Statement of cash flows and the purpose of its preparation - Accounting for Management
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Statement of cash flows and the purpose of its preparation

 Posted in: Statement of cash flows (explanations)
The term cash flows refers to the receipts and payments of cash. Companies periodically disclose the cash flows arising from its
various activities in the form of a statement. This statement is known as statement of cash flows (or cash flow statement).
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. In addition, it
discloses the sources (how the cash has been generated) and disbursement of cash (how the cash has been utilized).
A company’s total cash flows during its accounting period is generally categorized as operating , investing and financing cash flows.
To properly report these three types of cash flows, the statement of cash flows is divided into three sections – operating activities
section, investing activities section, and financing activities section. (Read ‘three sections of the statement of cash flows’ article).
The presentation of SCF is essential for the companies that are required to prepare and present their financial statements in
accordance with international accounting standards (IASs) and international financial reporting standards (IFRSs).
Purposes of the statement of cash flows (SCF)

The main purposes of preparing a statement of cash flows are as follows:
(1). Explanation of the changes in cash:

SCF explains the reasons of the change in company’s cash and cash equivalents during a particular accounting period by showing
the details of cash generated and cash used to perform operating, investing and financing activities of the business.
(2). Anticipation of future cash flows:

The management, creditors, actual and perspective investors and competitors of the company are interested to know the ability of
the company to generate positive cash flows in future. The SCF enables these parties to understand how company manages cash
and to anticipate the impact of current cash receipts and cash disbursements on future cash flows of the business.
(3). Legal requirements:

In some countries, the companies are legally required to prepare and present financial statements in accordance with international
financial reporting standards (IFRSs). As the statement of cash flows (SCF) is one of the basic components of financial statements,
its presentation is legally required in some countries.
https://www.accountingformanagement.org/importance-and-use-of-statement-of-cash-flows/ 1/3
4/8/2020 Statement of cash flows and the purpose of its preparation - Accounting for Management
(4). Information about non-cash investing and financing activities:

Companies also engage in various investing and financing activities that do not require the use of cash. Such activities are known
as non-cash investing and financing activities. Sometime these activities have a significant impact on the future cash flows of the
entity and therefore their disclosure to the users of financial statements becomes necessary. For this purpose, a company that
performs any significant non-cash investing and financing activity during the accounting period must disclose it either in the
statement of cash flows or in the footnotes to the financial statements.
The examples of non-cash investing and financing activities that may become significant for a company are given below:
Purchase of land for issuing common stock.

Issuance of common stock to discharge a liability.
Purchase of equipment for issuing a note.
(5). The difference between net income and net cash flows from operating activities:
The SCF explains the reasons of the difference between the net income and the related net cash flows from operating activities.
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3 COMMENTS ON
Statement of cash flows and the purpose of its preparation
KANIKA SACHDEVA
The information shared by you is really good, informative and easy to understand but I want some more inputs on topics like cash
flow statement. If could provide with some more inputs on practical questions and caselets on ratio analysis portion as well as in
cash flow statement that will be really helpful.
REPLY
INDRAJIT SARKAR
format and I want to know in details.
REPLY
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4/8/2020 Statement of cash flows and the purpose of its preparation - Accounting for Management

HOME EXPLANATIONS EXERCISES PROBLEMS QUIZZES CALCULATORS

ONLINE ESSAY HELP

Purposes of the statement of cash flows (SCF)

(1). Explanation of the changes in cash:

(2). Anticipation of future cash flows:

(3). Legal requirements:

(4). Information about non-cash investing and financing activities:

Purchase of land for issuing common stock.

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format and I want to know in details.

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