Purpose Of The Statement Of Cash Flows And The Information It Provides (Research Paper Sample)

Statement of Cash flow
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Statement of Cash Flow
Purpose of the statement of cash flows and the information it provides
Statement of Cash flows is one of the financial statements usually prepared by business entities. It is an indication of actual inflow and outflow of cash in the business (Palepu et al., 2014). It is a means through which sources and uses of cash in the business are indentified and accounted for. One may argue that the role of statement of cash flow is actually duplicated since the statement of financial performance also does carry out such role (Brooks, 2010). The difference is based on the fact that the statement of financial performance is actually created on accrual basis and does not consider actual inflow and out flow of cash into the business.
There are certain items that are included in the statement of financial performance which do not involve actual cash out flow from the business (Palepu et al., 2014). Example is the depreciation expense which is an indication of cash outflow in the business from the point of income statement, yet in reality there is no cash that is paid in relation to the depreciation expense (Brooks, 2010).
Purpose of the statement of cash flows is therefore to determine the different pieces of activities that the business engages in and determining which activity is actually productive in terms of providing positive cash flows and which one is not productive in terms of creating cash flows (Brooks, 2010).
Why statements of cash flows are important in assessment of financial strength of organization
The financial strength of a company is only determined through carrying out an analysis of the financial statements of the company. The financial statement elements can be analyzed from the standalone point of view or from a comparative point of view (Drake & Fabozzi, 2014).The statement of cash flow is one such item in the financial statement of the company that can be used in terms of tracing the financial health of a company.
The first criterion that can be determined through the cash flow statement is the liquidity position of the company. Each and every organization requires cash in order to meet its obligations in the short run. The current liability of the business is only met through having proper current assets which is an indication of a positive liquidity position (Drake & Fabozzi, 2014). When a firm has a positive cash flow, it means that it is able to meet its obligations in the short run as at that point when they fall due.
When a business is not capable of meeting its short ...