BUAD 803: Principles of Accounting Registration Number: DP17MBA0967
The cash flow statement is a key accounting financial statement. In the cash flow statement sensitive information is shared to investors, shareholders, debtors and other business associates within an accounting period. The cash flow statement exposes the position and financial strength of a business. The cash flow statement, income statement and balance sheet are the three main financial statements. A cash flow statement relates monetary flow within an enterprise. These cash flow operations are divided into three, namely the operating activities, investing activities and financing activities. Operating activities consist of revenue generating activities inclusive of the effects of cash transactions on net profit or loss. Investing activities involves asset related transactions like selling and acquisition of fixed assets in buildings or equipment’s including shares. Financing activities display a shift or formation in owner’s capital or credit consisting of contributions, distributions, purchase and stock issuance; and debt. The direct method or the indirect method is used in preparing the statement of cash flow. The direct method is preferred by standard accounting bodies like the Financial Accounting Standards Board in America and the Nigeria Accounting Standard Board. Nevertheless, the indirect method is maintained by most companies in the preparation of cash flow statements, starting with the net income of the operating activities and adjustments for cash provision. The indispensability of the cash flow statement lies in the extent to which the company and its investors can deduce the discrepancies in the level of cash inflows and outflows from both internal and external sources. Though the income statement shows loan servicing activities and the balance sheet depicits debt, it is only the cash flow statement that highlights the cost of loans. Sales and profit are recorded in the income statement, but it is the cash flow statement which reveals if sales have generated sufficient funds to meet expenditures. Partly the cash flow statement is important to a business that prioritizes internal cash sources as opposed to the external sources. Some reasons why the internal cash source considerations make the cash flow statement relevant are
• Debt prevention and monitoring
• Interest preservations, debt cost and payment penalties
• Ensuring cash availability for timely investment
• Timely payments of debts and expenses
• Securing regular business income as against reliance on external sources
The cash flow analyses and management serve multiple purposes of which the very significance is to give the proprietors and management an eye into the company’s financial status. Better informed decisions can be made with this knowledge in the daily operations of the company, in future investment needs, and capital required for debt or equity investments. Business of all sizes face cash management issues, while the cash flow statement is not the only method for cash flow monitoring, it forms a basic element in reporting statements and should not be overlooked by financial managers. Please find attached below the Cash Flow Statement.