Why is the Statement of Cash Flows Prepared? How is the Statement of Cash Flows different from the Income Statement? What types of transactions are presented in each section?
Solution
The cash flow statement, or statement of cash flows, measures the sources of a company\'s cash and its uses of cash over a specific time period. The income statement, or statement of financial performance, measures a company\'s financial performance, such as revenues, expenses, profits or losses over a specific time period.
A cash flow statement shows exactly how much money a company has received and how much it has spent, traditionally over a period of one month. It captures the current operating results and changes on the balance sheet, such as increases or decreases in accounts receivable or accounts payable, and does not include noncash accounting such as depreciation and amortization. A cash flow statement is used to determine the short-term viability and liquidity of a company, specifically how well it is positioned to pay its bills and vendors.
An income statement is the most common financial statement and shows a company\'s revenue; total expenses, including noncash accounting such as depreciation; and profit or loss, traditionally over a period of one month. An income statement is used to determine the financial performance of a company, specifically how much revenue it made, how many expenses it paid, and the resulting profit or loss from the revenue and expenses.
The cash flow statement is linked to the income statement by net profit or net burn. The profit or burn on the income statement becomes the first line of the cash flow statement and is used to calculate cash flow from operations. This is referred to as the indirect method. The direct method can also be used to prepare the cash flow statement, where the money received is subtracted from the money spent to calculate net cash flow
The Cash Flow Statement is divided into three distinct sections:
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Why is the Statement of Cash Flows Prepared- How is the Statement of C.docx
1. Why is the Statement of Cash Flows Prepared? How is the Statement of Cash Flows different
from the Income Statement? What types of transactions are presented in each section?
Solution
The cash flow statement, or statement of cash flows, measures the sources of a company's cash
and its uses of cash over a specific time period. The income statement, or statement of financial
performance, measures a company's financial performance, such as revenues, expenses, profits
or losses over a specific time period.
A cash flow statement shows exactly how much money a company has received and how much it
has spent, traditionally over a period of one month. It captures the current operating results and
changes on the balance sheet, such as increases or decreases in accounts receivable or accounts
payable, and does not include noncash accounting such as depreciation and amortization. A cash
flow statement is used to determine the short-term viability and liquidity of a company,
specifically how well it is positioned to pay its bills and vendors.
An income statement is the most common financial statement and shows a company's revenue;
total expenses, including noncash accounting such as depreciation; and profit or loss,
traditionally over a period of one month. An income statement is used to determine the financial
performance of a company, specifically how much revenue it made, how many expenses it paid,
and the resulting profit or loss from the revenue and expenses.
The cash flow statement is linked to the income statement by net profit or net burn. The profit or
burn on the income statement becomes the first line of the cash flow statement and is used to
calculate cash flow from operations. This is referred to as the indirect method. The direct method
can also be used to prepare the cash flow statement, where the money received is subtracted from
the money spent to calculate net cash flow
The Cash Flow Statement is divided into three distinct sections:
