Statement of Cash Flows: Purpose and Contained Information
University of Phoenix
November 29, 2010
Statement of Cash Flows
The statement of cash flows serves multiple purposes. One is providing information about a company’s cash payments and receipts during a given period. A second purpose is to provide cash-basis information about the company’s operating, financing, and investing activities. Its format reconciles the beginning and ending cash balances for the period (Kieso, Weygandt & Warfield, 2007). The operating activities involve the cash effects of transactions that enter into the determination of net income, such as cash payments to employers and suppliers for acquisitions of expenses and inventory and also, the cash receipts from sales of goods or services.
Furthermore, investing activities generally involve long-term assets and include acquiring and disposing of investments and productive and making and collecting loans. Financing activities involve liability and stockholders’ equity items and include obtaining capital from owners and providing them with a return on, and a return of, their investment and obtaining cash from creditors and repaying the amounts borrowed. The operating activities category is the most important. It shows the cash provided by company operations. This source of cash is generally considered to be the best measure of a company’s ability to generate enough cash to continue as a going concern. Companies classify some cash flows relating to investing or financing activities as operating activities.4 For example, companies classify receipts of investment income (interest and dividends) and payments of interest to lenders as operating activities.
Conversely, companies classify some cash flows relating to operating activities as investing or financing activities. For example, a company classifies the cash received from the sale of property, plant, and...