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Statement of Cash Flows in Financial Accounting

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 firms 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.

Figure 4.1 - Statement of Cash FlowsDirect Approach

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8/12/2019 Statement of Cash Flows in Financial Accounting

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According to SFAS No. 95, the statement of cash flows is intended to help financial statement

readers assess

1.a firms ability to generate positive future net cash flows;2.a firms ability to meet its obligations, its ability to pay dividends, and its need for

external financing;

3.the reasons for differences between net income and associated cash receipts andpayments; and

4.the effects on a firms financial position of both its cash and its noncash investing andfinancing transactions.

Ultimately, a firms cash-generating ability affects its solvency, its capacity to pay dividends and

interest, and the price of its securities. Accordingly, a firms 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 cashflows

Topics under Statement of Cash Flows

1.Accrual Earnings Versus Cash Flow as a Performance Measure2.Cash and Cash Equivalents3.Classification Of Activities Generating Cash Flows4.Direct Versus Indirect Approach of Statement of Cash Flows5.

Using Cash Flow Information: Operating Activities6.Ratios in Cash Flow Activities

1.Cash Return on Assets Ratio2.Quality of Sales Ratio3.Quality of Income Ratio4.Cash Interest Coverage Ratio

7.Using Cash Flow Information: Investing And Financing Activities

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