Purpose of the Statement of Cash Flows

Chapter 23
1. What is the purpose of the statement of cash flows?   What information does it provide?   Explain why statements of cash flows are important when assessing the financial strength of an organization.
Statement of cash flow is used in conjunction with the other financial reports, specifically balance sheet and retained earnings statement.   The balance sheet is used to determine the increase or decreases in accounts that affect cash and to properly annotate the purchase of equipment or land, depending upon the purpose of business usage.   Retain earnings statement provides the net income and dividends paid for the Cash Flow statement.   By using this information a business is able to interpret the inflow and outflow of cash within the organization by tracking cash receipts.
The statement of cash flow is broken down into three distinct sections: operating activities, financing activities, and investing activities.   Each section outlines the company’s usage of cash. Showing all changes that partook during the period, this information can be particularly relevant to potential investors of the company as it better identifies cash usage for the organization.   The balance sheet consists of many account totals that are gathered using estimates and or assumptions to reach its final figure, this is why the statement of cash flow is more reliable than the other statements for determining cash usage and availability.   The most sustainable of the three sections in the statement of cash flow is the operating activities section.   Operating activities is also the most relevant for evaluating a business’ cash flow.

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2013). Intermediate accounting (15th ed.). Retrieved from The University of Phoenix eBook Collection database.