Dissertation: Statement of Cash Flows

Dissertation: Statement of Cash Flows
12/04/2011 Comments Off on Dissertation: Statement of Cash Flows Academic Papers on Business Studies,Sample Academic Papers admin

The statement of cash flows is a statement presenting the inflows and outflows of cash in a company. This statement presents information to decision makers about the sources and resources of cash in an entity. The information provided in financial statements is used and analyzed by various decision makers. All financial statements have different information regarding the profitability and position of the business but out of these, the statement of cash flows is quite important. The information contained in the statement of cash flows is quite important to shareholders, banks, suppliers, customers, and analysts to make decisions based on the level of liquidity and the utilization of cash in a corporation (International Accounting Standards Board 2008).

The statement of cash flows presents cash flow information with respect to three major activities which are cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. The three activities are separated to present cash flows in three main areas of business. The decision makers can also evaluate the utilization of cash in different areas of business and how cash is allocated in the entire financial structure of the company. The cash flow from operating activities is directly linked to the income and operations of the business such as increase or decrease in current assets and liabilities (Eisen 2007).

The cash flow from investing activities involves the cash inflow and outflow in investments such as purchase and sale of fixed assets. The cash flow from financing activities presents information related to various financing options such as common shares, preferences shares, and long-term bonds. The cash flow from operation is the most important component of the statement as it covers the amount of cash used in operating activities and the cash generated from them. This clarifies the efficiency of the management in using cash in the day-to-day operations of running the business. Business operations are the most important element of the company and the cash flows required for these operations have the highest level of significance among the three elements of cash flow statements (Bandler 1994).

Two important elements of the cash flow from operations are the noncash items and changes in working capital of the company. The cash flow statement is one of the most important statements included in the annual report of an entity and it is mandatory for corporations to prepare a statement of cash flows under the Generally Accepted Accounting Principles – GAAP (Federal Accounting Standards Advisory Board 1993). The procedure for preparing a statement of cash flows is governed by the International Accounting Standards – IAS standard 7. The procedure for preparing a statement of cash flows under UK GAAP is quite similar to IAS 7 with the exception of format and disclosures. UK GAAP requires Statement of cash flows to be presented in nine subheadings while IAS requires only 3 subheadings of operating activities, investing activities and financing activities. This difference does not mean that the amount of cash utilized and generated in various areas of the business will be different under the two standards; it only implies the difference in the presentation of the statement of cash flows (Gee 2006).

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