Purpose and Elements of Statement of Cash Flows GAAP requires the statement of c

Question

Purpose and Elements of Statement of Cash Flows GAAP requires the statement of cash flows be presented when financial statements are prepared Answer the following questions in the Discussion Boaro: a. Explain the purposes of the statement of cash flows. b. List and describe the three categories of activities that must be reported in the statement of cash flows C. Identify and describe the two methods that are allowed for reporting cash flows from operations d. Describe the financial statement presentation of noncash investing and financing transactions. Include in your description an example of a non-cash investing and financing transaction. Kieso, D. E., Weygandt, J. J , & Warfield, T D. (2016). Statement of cash flows. Intermediate accounting (16th ed.). (p. 1393). New York, NY: John Wiley & Sons, Inc

Explanation / Answer

Answer a) Cash flow statement is a financial statement which shows changes in balance sheet accounts and income affecting cash and cash equivalents. Purpose of cash flow is to assess liquidity and solvency of the firm, its indicate the firm’s ability to generate cash & future cash, it provides comparability of different firm’s operating performance by eliminating effect of other accounting method .

Answer b) Activities of cash flow : Cash flow statement is broken down further under three activities . These are –

Answer C) Method of cash flow : There are two method of preparing and presenting cash flow . These are –

Answer D) Investing and financing transactions that do not require the use of cash or cash equivalents should be excluded from a cash flow statement. Such transactions should be disclosed      elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities. Many investing and financing activities do not have a direct impact on current cash flows although they do affect the capital and asset structure of an enterprise. The exclusion of non-cash transactions from the cash flow statement is consistent with the objective of a cash flow statement as these items do not involve cash flows in the current period.

Examples of non-cash transactions are:

(1) the acquisition of assets by assuming directly related liabilities;

(2) the acquisition of an enterprise by means of issue of shares; and

(c) the conversion of debt to equity.

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