Cash Flow Statement
Essay title: Cash Flow Statement
The cash flow statement shows the sources of cash receipts and the purpose of cash payments during an accounting period. The statement is helpful to explain the changes in the balances of the cash account. The statement helps assist investors, creditors, and others in assessing the following factors (Ў§Student RecoursesЎЁ, 1998) as:
The ability of the company to generate positive cash flows.
The ability of the company to meet its obligations and to pay dividends.
The companys need for external financing.
The reasons for differences between reported profits and the related cash flows.
The cash and non-cash aspects of the companys investing and financing activities during the period.
The causes of the change during the period in the companys cash balance.
The cash flow statement shows the cash flow from investing, finance activities and operating activities. Investing activities involve acquisitions or sales of investments or plant assets. These cash transactions are shown in the investing activities section on the cash flow statement.
Finance activities are transactions such as borrowing, repaying borrowed amounts or making distribution to owners. These cash transactions are reported in the financing activities section of the cash flow statement.
Operating activities category include transactions such as selling goods or services, earning investment income, and incurring costs and expenses. There are two methods to calculate cash flow from operations, the direct method and the indirect method. Although the majority of the companies