Statement of Cash Flows

Statement of Cash Flows

There are four major statements in accounting. They include the balance sheet, income statement, statement of owner’s equity, and statement of cash flows. The last statement, statement of cash flows, is one of the most important statements to a creditor or investor. The information provided within the statement of cash flows is important when assessing the financial strength of an organization.

Analysis

Purpose & Preparation

“The purpose of the statement of cash flows is to provide information about a company’s cash receipts and cash payments during a period” (Kieso, Weygandt, & Warfield, 2007). The purpose of the statement is to break down where the company received money from and what the company did with the cash. The statement of cash flows basically reconciles the beginning and ending cash for a period the same way people balance their bank statements.

The statement of cash flows is created by determining the change in cash, determining the net cash flow from operating activities, and determining net cash flows from investing and financing activities. The information is gathered from the comparative balance sheets, current income statement, and select transaction data. Two methods can be used in order to create the statement of cash flows; direct and indirect methods. The FASB prefers companies to use the direct method in order to report the statement of cash flows. However, the indirect method is less time consuming and often more practical for a company to complete. The indirect method also allows more information to be shown on the statement in comparison to the direct method.

Provided Information

Both the direct and indirect methods provide valuable information. Information provided by the statement of cash flows includes the cash receipts and payments by operating, investing, and financing activities. The operating activities displays the cash which has affected the net income. An example of an operating activity on the...