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The Statement of Cash Flow Is Not Redundant and Necessary for Investment Decision Making

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The Statement of Cash Flow Is Not Redundant and Necessary for Investment Decision Making
Introduction The manager of Dowlais Iron Company, made a new financial statement called "comparison balance sheet", in 1863 to explain the reason for the inability to invest was due to the holding of too much inventory, despite the profit made. This was the beginning of the cash flow statement, which was later made compulsory by the Financial Accounting Standard Boards (FASB) under Generally Accepted Accounting Principles (GAAP). This step was followed by International Accounting Standard Boards (IASB) when they issue IAS 7 Cash Flow Statement. The Cash Flow Statement only reported transactions that took place by the use of cash or cash equivalents, and discarded anything that was recorded on accrual basis in Balance Sheet (Statement of Financial Position) and the Profit and Loss Statement (Statement of Comprehensive Income). The construction of the Cash Flow Statement is divided into three; cash flow from operating, investing and financing activities. With two approaches in constructing Cash Flow Statement; direct and indirect approach, the difference is basically on the construction of the first part, operating activities. Cash flow from operating activities are cash flow from principal revenue-producing activities of the company and other activities that are not investing or financing activities. In using the direct method approach, it would have to start from scratch; what are the cash receipts and cash payments made during the period, while the indirect method approach would start with the profit before tax figure and later, adjustments are made, i.e. depreciation, increase or decrease in inventories, receivables, payables, etc. The other two activities (financing and investing) remain the same regardless of methods used. Financing activities are activities that result in changes in the size and composition of the equity capital and borrowings of the enterprise. For example, the issuance of the company's shares, payment of dividends, borrowings, etc.
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