£199.99 £139.99 for one year of Unlimited learning. Offer ends on 14 November 2022 at 23:59 (UTC). T&Cs apply

Find out more
The purpose of cash flows
Skip main navigation

The purpose of cash flows


Answer to the previous exercise

Event On profit On cash
Repayment of a loan 1. None 2. Decrease
Making a sale on credit 3. Increase 4. None
Buying a non-current asset for cash 5. None 6. Decrease
Depreciating a non-current asset 7. Decrease 8. None
Receiving cash from a debtor/trade receivable 9. None 10. Increase
Buying some inventory for cash 11. None 12. Decrease
Making a share issue for cash 13. None 14. Increase

Statement of cash flows

  • Reports information regarding cash inflows and cash outflows for a particular period of time.
  • Prepared on a cash basis, not an accrual basis.
  • The statement of cash flows helps ascertain the cash generation from the operating cycle and whether or not the entity is collecting its receipts in a timely manner.

The flow of cash within the business cycle

For an entity to survive, the net cash flows from operating activities should be positive.

Payment for inventory and wagers > Sale of inventory or service > receipts from sales > goes back to Payment for inventory and wagers”>

The purpose of a statement of cash flows

  • The purpose of the statement of cash flows is to provide users of financial statements with information about the cash flows of the entity.
  • It shows the cash receipts and payments, and the net effect.
  • The statement of cash flows can help a user evaluate the entity’s potential to
    • generate cash flows,
    • meet its financial commitments,
    • fund its activities and
    • obtain finance.
This article is from the free online

Accounting for Today’s Dynamic World

Created by
FutureLearn - Learning For Life

Our purpose is to transform access to education.

We offer a diverse selection of courses from leading universities and cultural institutions from around the world. These are delivered one step at a time, and are accessible on mobile, tablet and desktop, so you can fit learning around your life.

We believe learning should be an enjoyable, social experience, so our courses offer the opportunity to discuss what you’re learning with others as you go, helping you make fresh discoveries and form new ideas.
You can unlock new opportunities with unlimited access to hundreds of online short courses for a year by subscribing to our Unlimited package. Build your knowledge with top universities and organisations.

Learn more about how FutureLearn is transforming access to education