Statement of Cash Flows Paper
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Statement of Cash Flows Paper
This paper will answer question one from the end of chapter 23. The question has two parts. The first part asks, “What is the purpose of the statement of cash flows?” (Kieso, Weygant, & Warfield, 2004). The second part of the question asks, “What information does it (the statement of cash flows) provide?” (Kieso, et al., 2004). This paper will also include an explanation of why statements of cash flows are important when assessing the financial strength of an organization.
According to the text, the main purpose of for the statement of cash flows is to “provide information about an entity’s cash receipts and cash payments during a period” (Kieso, et al., 2004). A secondary, but still important, reason for the statement of cash flows is also mentioned in the text. The statement of cash flows provides information on a cash basis about an organization’s operating, investing and financing activities. (Kieso, et al., 2004)
The statement of cash flows provides a great deal of information. The information includes cash receipts of an organization, cash payments an organization makes as well as the net change in cash from operating activities, investing activities and financing activities. This information is provided for a period of time and is formatted in such a way that the beginning cash balances are reconciled with the ending cash balances. (Kieso, et al., 2004)
Statements of cash flows have the important task of providing information about the financial strength of an organization. There are several types of information that can be determined by scrutinizing the statement of cash flows that can help investors, creditors and other users asses the financial strength. (Kieso, et al., 2004)
The first is that the statement of cash flows can show an organization’s ability to generate cash flows in the future. This is accomplished by studying the correlation between net cash flow from operating activities and increases or decreases in cash. Because the statement of cash flows “converts” the information in accrual accounting to a cash basis, it is relatively straightforward to make predictions about an organization’s future cash flows. (Kieso, et al., 2004)
The second area in which the statement of cash flows can help asses the financial strength is by showing the organization’s ability to pay dividends and meet other financial obligations. As the saying goes, “Cash is king.” Without cash an organization will not be able to pay its employees, acquire equipment and supplies or pay other debt. (Kieso, et al., 2004)
The statement of cash flows also helps the users to see the reasons for the difference between net income and cash flow from operating activities. With accrual basis accounting, various estimates are made. This leads to the question, “How reliable is the net income? Again, because the statement of cash flows shows adjustments to the accrual method, users can judge for themselves about whether or not to depend on the net income figure given. (Kieso, et al., 2004)
Another thing that the statement of cash flows helps the user see is the cash