IMPORTANCE OF CASH FLOW STATEMENT

Importance Cash Flow Statement



Abstract

The purpose of accounting is to provide the information that is needed to make civilized economic decisions. “Accounting is the process of tracking and analyzing cost and revenue information”. (Ismail, 2002, 211) The focal purpose of financial accounting is to plan a financial report that provides information about a firm's performance to outside parties such as investors, creditors, and tax authorities.

Importance of Cash Flow Statement

Introduction

The financial statement is used to formulate contractual terms between the company and other organizations. A variable of the financial statement like the current debt to equity ratio is important in deciding the amount of long term capital that would be required to be raised. The financial statements of other companies can also provide investment solutions to different companies. Sometimes it becomes difficult to decide the right field in which financial resources may be canalized. In such situations the financial statements of other companies provide the appropriate guideline. (Glautier, 2007)There are three basic financial statements, Profit & loss account (Income Statement), Balance sheet, Cash flow statement.

Discussion

The statement of cash flows is one of the main financial statements. (The other financial statements are the balance sheet, income statement, and statement of stockholders' equity.) The cash flow statement reports the cash generated and used during the time interval specified in its heading. The company chooses the period of time that the statement covers.(Shoaf,2001)

Cash Flows from Operating Activities

This section shows how much cash comes from sales of the company's goods and services, less the amount of cash needed to make and sell those goods and services. Investors tend to prefer companies that produce a net positive cash flow from operating activities. High growth companies, such as technology firms, tend to show negative cash flow from operations in their formative years. At ...