Statement Of Cash Flows
The result of a company's daily transaction of business in a certain period is summarized in the financial statements. These statements are the Balance Sheet where one can see how established the company is, the Income Statement where one can get a glimpse whether the company is earning or not, and the Statement of Cash Flows that provides information on how well the primary resource of the company, cash, is utilized. Cash is the most important of all assets of a company. Other than the fact that it is the medium of exchange, almost all business transactions involve it. Normally, a sale is valued at the cash received; if a sale is made on account, the eventual collection will be valued still on the cash received. This also applies in the purchase of equipments, materials that would be converted to products, or that would compose the goods available for sale, in settlement of debts, or in payment of expenses incidental to the business. Essentially, a business entity cannot do business without the source from which income is derived, and the means to meet all its obligations. This basic principle is lodged on cash. As such, the Financial Accounting Standards Board issued Statement No. 95 that established th
It should be noted that only the Operating Activities section is affected by the presentation methods discussed. The statement has two components: cash receipts and cash payments; these components are embedded in each of the three parts of the statement namely, Operating Activities, Investing Activities, and Financing Activities. The second section of the statement, Investing Activities, is composed of items that have an indirect effect on the business operation. The first are the items that do not involve cash but affected income nonetheless like depreciation and amortization. Cash receipts included in this section are cash received from issuance of the company's own shares, and proceeds from borrowings. The Financing Activities section reveals information on the other sources and usage of funds that is primarily directed from and to stockholders and creditors. Cash receipts would normally include cash sales, collection from receivables, dividends, and interest. The second group is the gains and losses from transactions, which are included in either the Investing Activities or Financing Activities section of the statement. Use of either method would still result to the same bottom line figure, and the difference lies on convenience of the ones who prepares the statement and the ones who read it. Cash payments, on the other hand, may include payments for inventory purchases, salaries, taxes, selling expenses, utilities, rent, and the like. This goes on to say that the management, creditors, and investors would find the figure very useful. This includes purchase or sale of long-term assets such as equipments, building, land, and other assets that do not normally form part of the company's inventory. This was done to help both creditors and investors to better evaluate the company's utilization of cash and predict future cash flows. On the other hand, cash disbursements are generally for distribution of cash dividends, payment of loans, and purchase of treasury stock. The indirect method begins with the net income.
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