The individual causes of those changes are explained by means of the income statement and the statement of cash flows. During the course of that time, total reported net assets either increase or decrease as does the entity’s cash balance. The income statement and the statement of cash flows connect the balance sheets from the beginning of the year to the end. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas” (Dell & Fredman, 1999). But cash flow was not a regularly discussed topic. To reiterate the importance of this information, Michael Dell, founder of Dell Inc., states in his book Direct from Dell: Strategies That Revolutionized an Industry (written with Catherine Fredman): “We were always focused on our profit and loss statement. GAAP for every period in which an income statement is reported. Consequently, presentation of a statement of cash flows is required by U.S. The acquisition of other assets, the payment of debts, and the distribution of dividends inevitably leads back to a company’s ability to generate sufficient amounts of cash. They are able to see how corporate officials managed to get and then make use of the ultimate asset: cash. In fact, some decision makers view it as the most important of the financial statements. The delay in examining the statement of cash flows should not be taken as an indication of its lack of significance. Thus, an understanding of those statements is a helpful prerequisite for the construction of a statement of cash flows. Instead, the accounts and amounts shown here are derived from the other financial statements. What is the rationale for presenting a statement of cash flows?Īnswer: Coverage of the statement of cash flows has been delayed because the figures presented do not come directly from ending T-account balances found in a business’s general ledger. This statement was introduced briefly in Chapter 3 “In What Form Is Financial Information Actually Delivered to Decision Makers Such as Investors and Creditors?”. Terms such as “FIFO,” “accumulated depreciation,” “goodwill,” “capital stock,” “bad debt expense,” and the like that might have sounded like a foreign language at the start of this exploration into financial accounting should now have a genuine meaning.Įxamination of one last statement is necessary to complete the financial portrait of a reporting entity: the statement of cash flows. At this point, a student should be able to access a set of financial statements (on the Internet, for example) and understand much of the reported information. Question: Thus far in this textbook, the balance sheet and the income statement have been studied in comprehensive detail along with the computation of retained earnings. Indicate the type of transactions that are reported as financing activities and provide common examples.Indicate the type of transactions that are reported as investing activities and provide common examples.Indicate the type of transactions that are reported as operating activities and provide common examples. ![]() Identify the three categories of cash flows used for reporting purposes.Describe the purpose of a statement of cash flows.At the end of this section, students should be able to meet the following objectives:
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