Statement of Cash Flows
Essay Preview: Statement of Cash Flows
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The statement of cash flows is an essential financial statement in the accounting industry. It is one of four principal financial statements required by GAAP. The primary purpose of the statement of cash flows is to provide relevant information about the cash receipts and cash payments of a business during a period. The statement indicates why cash (including short-term investments that are equivalent to cash) changed during the period by reporting net cash provided or used by operating activities, investing activities, and financing activities. This paper will discuss the direct method and indirect method of the statement of cash flows and will also discuss the different sections for the statement of cash flows and how it assists a variety of different users.
The statement of cash flows reports cash flows in the following categories: Operating activities which are transactions which affect net income, Investing activities which are transactions that affect investments in fixed assets such as property, plant and equipment, and finally Financing activities which affect the equity and debt of the business.
The user assisted most by the operating activities would most likely be accounts payable. This section of the cash flow statement includes cash payments such as inventory, payroll, taxes, interest utilities and rent. The net amount of cash provided (or used) by operating activities is the key figure on a statement of cash flows.
The user assisted most by investing activities would be investors and creditors. This section is used to evaluate managements abilities to manage cash now and in the future. It also assesses the companys ability to pay dividends and to pay creditors.
The user assisted most by financing activities would be the business owner and creditors. All financing activities deal with the flow of cash to or from the business owners (equity financing) and creditors (debt financing).
There are two methods that are used in calculating and reporting the amount of net cash flow from operating activities: the indirect method and the direct method. Both methods produce identical results, the indirect method is used more often because it reconciles the difference between net income and the net cash flow provided by operations.
The direct method is less popular but is favored by many financial managers because it reports the source of cash inflows and outflows directly, without