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Statement of Cash Flows

Vernon C. Daniels Jr
ACC/421
June 2, 2014
Walfyette Powell














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Statement of Cash Flows

One of the three primary financial reports that companies utilize is the statement of cash
flows. It is a crucial part of the external financial reports these companies should provide
according to the generally accepted accounting principles. To its users, the statement of cash
flows provides relevant data as to the financial health of an organization.
Purpose
The primary purpose of the statement of cash flows is to provide information about a
companys cash receipts and cash payments during a period (Kieso, Weygandt, & Warfield,
2012, p. 1436). The statement of cash flows emphases the bases and utilization of cash within a
given period of time. The statement of cash flows also clarifies the ups and downs in cash and
provides data associated with an organizations operational, investment, and finance activities.
Information provided
The statement of cash flows provides information to help investors, creditors, and others
assess the following: the entitys ability to generate future cash flows, the entitys ability to pay
dividends and meet obligations, the reasons for the difference between net income and net cash
flow from operating activities, and The cash and noncash investing and financing transactions
during the period (Kieso, Weygandt, & Warfield, 2012, p. 1436). This information is utilized by
investors to assess whether or not organizations short-term cost of stock has the prospective to
rise. It is also utilized to determine an organizations capability to produce a dividend. The overall
financial health of an organization is represented by the statement of cash flows. This
representation is viewed by owners and lenders alike and gives them a view of the type of
financial decisions being made within a given period of time. Owners, lenders, and investors,
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through the statement of cash flows, can see whether management is making sound or unsound
decisions regarding the finances of an organization.
Importance regarding financial strength
An investor or creditor utilizes the statement of cash flows to assess the financial strength
of an organization. Investors concerns revolve around whether or not there is a potential for a
return on their investment prior to doing business with an organization. Creditors are concerned
about the ability of the organization to pay off debt prior to loaning money.
Investors and creditors are not the only users of the statement of cash flows. Managers
and auditors also view this information and utilize it in different ways. Managers utilize the
statement of cash flows to assess whether or not the organization is making money as well as
how it is making money. Managers gain insight into what is profitable and what needs to be
improved upon to generate more revenue. Auditors assess, via the statement of cash flows, the
accuracy of financial reporting within the organization.
The statement of cash flows can be prepared in two ways; direct and indirect. When using
the direct method; operating activities such as cash disbursements and cash receipts are reported.
This method allots for a more compact income statement because it simply utilizes the
subtracting of cash disbursements from cash receipts. The indirect method adjusts net income
for items that affected reported net income but did not affect cash (Kieso, Weygandt, &
Warfield, 2012, p. 1442). One differing factor concerning the direct method and the indirect
method is the direct method displays operational cash receipts and payments where the indirect
method does not.


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Despite there being a difference in how the direct and indirect method present
information; the end result remains the same.
Users of the statement of cash flows get a snapshot depicting the reasons behind the
decisions made by organizations and with the snapshot they can determine what the future holds
for the organization. Having this ability affords the users the opportunity to make informed
decisions regarding the organization as a manager, auditor, investor, or creditor.
Conclusion
Cash receipts and payments received and made by an organization are the bulk of the
information provided by the statement of cash flows. Net changes in the operating, investing, and
financing activities are also pertinent information available through the use of the statement of
cash flows.
Understanding each section and its importance gives users the necessary information
needed to affective make decisions regarding an organization.










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References
Kieso, D.E., Weygandt, J.J., & Warfield, T.D. (2012). Intermediate Accounting (14th ed.).
Retrieved from The University of Phoenix eBook Collection database.