Handout 2 Essay

1322 words - 5 pages

BU1002 - Accounting for Decision Making Session 6, 2014
Session 6
Statement of Cash Flows
Ref - Ch 7 - Birt et el
Accounting for Decision Making
Session Outcomes
Statement of Cash Flows
explain the purpose of a statement of cash flows
assess why a statement of cash flows is needed
explain the relationship of the statement of cash flows
to other financial statements
define cash
Outline the format & the classification of cash flows in
the statement of cash flows
discuss the usefulness of the statement of cash flows
Introduction to the 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
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
Cash operating cycle
The number of times an entity can cycle through this process
generally the more profit it can make (as long as prices are set
There is normally an outflow for inventory & wages before a sale is
Cash Flow Statement helps to determine if cash is collected in a
timely manner! 4
Remember: difference between cash &
accrual accounting
The accrual system is the basis of the
income statement and focuses on when a
transaction takes place regardless of the
receipt or payment of cash
In contrast, the statement of cash flows is
concerned with cash receipts and
payments, and not the timing of the
underlying transaction.
Cash vs Accrual accounting cont.

BU1002 - Accounting for Decision Making Session 6, 2014
Cash vs Accrual accounting cont.
Cash vs Accrual accounting cont.
Accrual vs cash
Why we have a Statement of Cash Flows in
an accrual reporting system!!
To provide information about:
cash receipts
cash payments
net change in cash resulting from operating, investing and
financing activities
To ensure that an entity has enough cash on hand to meet its
financial commitments in a timely fashion
Relationship of the Statement of Cash Flows
to other Financial Statements
The financial statements comprise:
1. the income statement
2. the balance sheet
3. the statement of changes in equity
4. the statement of cash flows
First three statements only show part of the activities of the
Relationship of the Statement of Cash Flows
to other Financial Statements cont.
Cash Flow Statement gives additional information to assist decision
makers in assessing an entity's ability to:
generate cash flows
meet financial commitments as they fall due
fund changes in scope and/or nature of activities
obtain external finance
Relationship of the Statement of Cash Flows
to other Financial Statements cont.
Classified into three main sections reflecting the major cash
flow activities
Operating activities
Investing activities
Financing activities
Non-current liabilities and
equity in the balance sheet

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