Cash Flow Statement provides more relevant and useful information to users of financial statements. When used in conjunction with accrual adjusted data included in the income statement and the balance sheet cash flow information helps to assess liquidity, viability and financial flexibility. Cash flow statement also helps to evaluate and economic decision related to the financial performance of an organisation. Decisions made on the basis of expected cash flows can be monitored and reviewed whenever additional cash flow information become available
IAS7 highlights the importance on a cash flow statement as essential part of a company’s financial statement and requires all companies to include a cash flow statement in their published accounts. It requires the entity to identify an increase or decrease in cash throughout the year under three standard headings of’ CASH FLOW FROM OPERATING ACTIVITIES, INVESTING ACTIVITIES, AND FINANCIAL ACTIVITIES.
There are two methods of presenting the cash flow activities
• Direct methods reports cash inflows and outflows directly, starting with the major categories of gross cash receipts and payments. This means that cash flows such as receipts from customers and payments to suppliers are stated separately within the operating activities. It demonstrates more of the qualities of true cash flow statement because it provides more information about the sources and uses of cash. This information is not available elsewhere and helps in the estimation of future cash flow. Direct methods is useful when user is attempting to predict a bankruptcy or future liquidation of company.
• Indirect method starts with profit before tax and adjusts this figure for non cash items such as depreciation and changes in working capital. It applies changes in working capital to net income. It highlights the difference between operating profit and net cash from operating...