Cash Flow

Understanding the statement of cash flows

The purpose of this paper is to provide an explanation of what the statement of cash flows is used for and to discuss what information is provided by the statement of cash flows. The statement of cash flows is one of the most important tools used by companies to make decisions based on their cash availability. Its primary purpose is to report the cash that is generated and expensed during the period being reported. The statement of cash flows is consists of three sections: Cash from Operating Activities, Cash from Investing Activities, and Cash from Financing Activities. Through analyzing each section of the cash flow statement we will determine what information is provided and what it means regarding the company. Overall the statement of cash flows can provide users with a better understanding of the financial health of a company by identifying where the cash came from, where it is going, and where it has ended up.

The first section of the statement of cash flows is the cash provided from operating activities. The operating activities commonly reveal the cash that is generated and paid out as a result of the company’s daily operations. This includes cash received from customers, paid to suppliers for materials, paid for wages and salaries, paid for taxes, paid for interest costs, and cash received from interest or dividends. The operating section includes the cash received from interests and dividends; however the cash that is paid out for interest or dividends are included in the cash flow from financing section.

There are two methods that are used to report the cash from operating activities, the direct method and the indirect method. The difference between direct and indirect method of cash flows are the operating activities, which is the first section of the statement of cash flows. The investing and financing activities sections has no reported differences in the presentation of the cash flows. The direct...