BUAD 803: Principles of Accounting Registration Number: DP17MBA0967
In most business there are key financial statements necessary in accounting generated regularly. This reports share sensitive information patterns of the business to lenders, shareholders, debtors and other business associates. This financial report also exposes the status of the company in terms of its financial strength. The income statement, balance sheet and the cash flow statement are some of the important financial statements. A cash flow statement or statement of cash flow signifies monetary flow within an enterprise made up of deposits and withdrawals. Theses cash flow operations can be divided into three, namely the operating activities, investing activities and financing activities. Operating activities consist of the revenue generating actions in the company inclusive of the effects of cash transactions that determines net profit or loss. Investing activities involves asset related transactions like selling and acquisition of fixed assets in buildings or equipment’s which could also include shares if resale is not intended in the business activity. Financing activities emphasizes a shift and composition in the proprietor’s capital or credit which may consist of contributions, distributions, stock issuance and purchase, and debt. The direct method or the indirect method may be utilized in preparation of the statement of cash flow. The direct method is usually the preferred method by standard accounting bodies like the Financial Accounting Standards Board in America and the Nigeria Accounting Standard Board. Nevertheless, the indirect method is preferred by most companies in the preparation of the Cash Flow Statements starting with net income of the operating activities and an adjustment for cash provision in the operating activities. The indispensability of the cash flow statement lies in the extent to which the company and its investors can deduce the discrepancies in the level of cash inflows and outflows from both internal and external sources. Though the income statement will show what is paid on a loan and the balance sheet shows what is owed, it is only the cash flow statement that signifies the cost of such loans. Sales and profit will be recorded by the income statement, but it is the cash flow statement that reveals if and weather the sales been generated are sufficient enough to meet expenditures. Partly the cash flow statement is important to the company because of the attributes of the company when internal cash sources are prioritized as opposed to the external sources. These assurances of the internal cash sources are
• Debt prevention and monitoring
• Interest preservations, debt cost and payment penalties
• Ensuring cash availability for timely investment
• Timely payments of debts and expenses
• Securing regular business income as against reliance on external sources
The cash flow analyses and management serve multiple purposes of which the very significance is to give the proprietors and management an eye into the company’s financial status. Better informed decisions can be made with this knowledge in the daily operations of the company, in future investment needs, and capital required for debt or equity investors. Business of all sizes are challenged in the management of cash, while the cash flow statement is not the only method for cash flow monitoring, it forms a basic element in reporting statements and should not be overlooked by finance practitioners. Please find attached below the Cash Flow Statement.