Thus far, our focus has been on the two long-standing, conventional financial statements: the balance sheet and the income statement. We now turn our attention to the statement of cash flows. This chapter describes the statement of cash flows, indicates how cash flow information can be used in analyzing the financial performance of a business, and explains the relationships among this statement, the balance sheet, and the income statement.
The statement of cash flows is designed to provide information about a firm’s inflows and outflows of cash during a period of time. It also explains the change in cash from the beginning of a period to the end of the period. Figure 4.1 contains an illustration of a statement of cash flows.
According to SFAS No. 95, the statement of cash flows is intended to help financial statement readers assess
- a firm’s ability to generate positive future net cash flows;
- a firm’s ability to meet its obligations, its ability to pay dividends, and its need for external financing;
- the reasons for differences between net income and associated cash receipts and payments; and
- the effects on a firm’s financial position of both its cash and its noncash investing and financing transactions.
Ultimately, a firm’s cash-generating ability affects its solvency, its capacity to pay dividends and interest, and the price of its securities. Accordingly, a firm’s ability to generate cash is important to financial statement users.
At the end of this chapter, you will know to:
- Describe the objectives of the statement of cash flows.
- Explain the complementary nature of accrual earnings and cash flows.
- Identify the three types of activities that generate and use cash.
- Explain the difference between the direct and the indirect methods of presenting a statement of cash flows.
- Draw inferences about the financial performance of a firm from the statement of cash flows
Topics under Statement of Cash Flows
- Accrual Earnings Versus Cash Flow as a Performance Measure
- Cash and Cash Equivalents
- Classification Of Activities Generating Cash Flows
- Direct Versus Indirect Approach of Statement of Cash Flows
- Using Cash Flow Information: Operating Activities
- Ratios in Cash Flow Activities
- Using Cash Flow Information: Investing And Financing Activities