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Statement of Cash Flows (Purposes of the Statement of Cash Flows…
Statement of Cash Flows
Purposes of the Statement of Cash Flows
Profitablility does not necessarily translate to liquidity
Shows how the firm was financed in the period, cash receipts and payments
Informs users about liquidity and solvency
Preparation of the Statement of Cash Flows
Cash flows from operating activities
Cash generated from operations
Direct method
Cash received
Cash paid
Indirect method - most common
Reconciliation of P&L
Changes in working capital
Relate to principal revenue-producing activity
Cash flows from investing activities
Relate to acquisition and disposal of NCAs
Cash flows from financing activities
Relate to changes in equity and borrowings
Limitations of the Statement of Cash Flows
Uses historical information
Commonly used indirect method provides little additional information
Year-to-year cash flows can be inconsistent due to financing and investing activites