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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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