One of the most important business accounting topics is preparation of financial statements. Cash Flows Statement is one of the four main financial statements to be prepared on the activities of business and it provides details of cash receipt sources and cash major uses for the particular accounting period. Income Statement and Balance Sheet do not provide these details.
Essence Of Cash Flows Statement
Preparation of Income Statement is based on the accrual principle, which means that revenue and expenses are recognized despite whether cash was received or paid. Therefore business can be profitable, but have no cash due to poor ability to generate sufficient cash inflow.
Balance Sheet provides only cash balance at the end of each accounting period and no details how this balance was gathered are provided. That is why Cash Flows Statement is very important since it provides details how cash balance changed over the accounting period and what were the main reasons for such change.
This statement has three main parts which specify changes in cash into main types which are called activities. These parts are:
From practical point of view it is necessary that business generates sufficient cash from its main activities, therefore Operating Activities part is very important. If the balance in this part is negative, the business for the accounting period was not able to general sufficient cash from its main activities and most probably business operations were financed by cash received from investing or financing activities.
Such situation cannot last long, since business cannot be viable if it generates cash from receipt of loans (financing activities) or sale of plant assets (investing activities). All these aspects can be seen from the Statement Of Cash Flows.
Essence Of Cash Flows Statement
Preparation of Income Statement is based on the accrual principle, which means that revenue and expenses are recognized despite whether cash was received or paid. Therefore business can be profitable, but have no cash due to poor ability to generate sufficient cash inflow.
Balance Sheet provides only cash balance at the end of each accounting period and no details how this balance was gathered are provided. That is why Cash Flows Statement is very important since it provides details how cash balance changed over the accounting period and what were the main reasons for such change.
This statement has three main parts which specify changes in cash into main types which are called activities. These parts are:
- Operating Activities - inflows or spending related to the main activities of the business (i.e. sales of goods, provision of services)
- Investing Activities - inflows or spending related to the investing activities (i.e. sale or purchase of plant assets and other non-current assets)
- Financing Activities - inflows or spending related to the financing activities (i.e. receipt or repayment of loans, payment of dividends)
From practical point of view it is necessary that business generates sufficient cash from its main activities, therefore Operating Activities part is very important. If the balance in this part is negative, the business for the accounting period was not able to general sufficient cash from its main activities and most probably business operations were financed by cash received from investing or financing activities.
Such situation cannot last long, since business cannot be viable if it generates cash from receipt of loans (financing activities) or sale of plant assets (investing activities). All these aspects can be seen from the Statement Of Cash Flows.
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