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12/24/21

THE PURPOSE OF CASH FLOW STATEMENT

 
Cash flow statement

What is cash flow statement?

Cash flow statement is a financial information which shows the cash inflow and outflow of an Enterprise or business organization in a given account year or a reporting period,but exclude inflow arising from changes in cash as a result of the purchase and liquidation of cash equivalent. It is prepared of cash and cash equivalent. It is prepared to assists users of financial statement know the pattern of cash equivalent generation and utilization by an Enterprise in a given period of time. The statement therefore reveals the ability of the enterpEnte to generate cash and cash equivalent, and assists users of financial statement to assess properly the liquidity position of the business organizationsand since cash is the ultimate measure of liquidity.

Benefits of cash flow statement

  1. Asses the impact of an Enterprise or business organizations Current transactions , Operation,iinvestments and financial activities
  2. Asses the ability of the Enterprise to meet it's Dept obligation,pay dividend and meet other claims.
  3. Asses the ability of enterprise to finanse ongoing operations and growth from internal sources and determine the amount of external financing required
  4. Asses the ability of the Enterprise to generate cash and cash equivalent which is the key to the continuous survival for the Enterprise and business organizations.
  5. Historical cash flow information is used as an indicator of the amount,timing and certainty of future cash flow.

Classification of cash flow statement

  1. Operating activities
  2. Investing activities
  3. Financial activities

Operating activities

This involves the normal trading activities of an Enterprise and business organizations, taking into consideration the level of growth and the profit generated from Business transactions. 

Investment activities

Relate to the acquizatacqand disposal of fixed assets, investment properties and other production assets held for use by the Enterprise usaul goods and services other than stock.

Financial activities

This includes obtaining resources from lenders and owners of the Enterprise and repaying the amount obtain either as they become due or when they are supplies to the requirement of these enterprises.

Preparing cash flow statement

There are two main  method of preparing cash flow statement namely
  1. Direct method of cash flow statement
  2. Indirect method of cash flow statement.

What is the purpose of cash flow statement?

Cash flow statement



The reason why cash flow statement is employed in any business is as follows;

To know the total number of goods or product that has been procured for the business at a particular period of time.

To analyze the losses that were accounted during the process of buying and selling of those goods or products

To have an idea of the total financial statement and to be able to plan well and budget for future business transactions, this will gives you an insight of were to make amends and correct mistakes that were taken for better outcome in the future.

To embark on research for new business opportunities and know the advantages and disadvantages that is involve in any business that the organization is trying to invest in.
Furthermore some of the purpose of cash flow statement are presented below;

For legal purpose;

Cash flow is done because most Businesses will have to present the documents of transactions for purpose of legal actions,in cases were there is a demand for documents by the courts for clerification in a cae were by the firm is acuse of fruadulent activities this document will be there vindicating factor because it will show their financial statements in the specific period of time. 

For the purpose of management strategies;

This will provide the information on the performance of the firm and the strategies that will be employed to manage and solve the loophole that exist in the organization. The online managers will have an insight on how to take critical decisions that will affect the performance of the firm. 

To acertain the financial condition of the organization;

Another purpose of cash flow statement is to acertain the condition of the funds that are available for Businesse transactions, whether they will be able to pay the workers salaries or taxes for the accounting period. Annually the the organization present it financial statement, and the coming years budget and how they will go about spending on projects that will be embark on.

To get information about the financial transactions;

This shows the information on transactions made by the firm in a particular period of time, providing the records of cost and balance sheet of previous Business activities and transactions. This purpose is to provide insights on how money's were spend, the amount that came in as profit and the finance that goes out for purposes of taxes, investment or loss record in a particular Business transactions in a specific period of time.

Provide information on changes in cash;

The changes in economic activities can affect the value of cash in any nation, another purpose of cash flow statement is to know the value of cash and how it changes from time to time for the purpose of making decisions that will forcast the future activities, because the prices of goods and services can change at any time because of inflation and other economic challenges. This will guide the business firm to take better decisions and also follow the trends on changes in the exchange rate in the international market.

In conclusion the purpose of cash flow statement is to give directions for business organizations to make plans and take more better decision for the purpose of making the business grow and improve the performance of transaction activities in the organization

1 comment:

  1. hi thanks for sharing about cash flow statement. i got so confused first about that but then i found dis amazing article!

    ReplyDelete

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