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The purpose of cash flows

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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.
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