How does the statement of cash flows helps readers understanding?

Answer 1

The statement of cash flows reports the effects of a firm's operating, investing, and financing activities on cash flows. Information in the statement helps in understanding the following
concepts:

1 . The effect of operations on the liquidity of a firm.
2 . The level of capital expenditures needed to support ongoing and growing levels of activity.
3 . The major changes in the financing of a firm.

To prepare the statement of cash flows requires analyzing changes in balance sheet accounts during the accounting period, as represented by the Cash Change Equation. As an outcome of correct double-entry recording of all transactions, the net change in cash will equal the net change in all noncash accounts.

The statement of cash flows usually presents cash flow from operations in the indirect format, beginning with net income for the period. The statement then adjusts for revenues not providing cash, for expenses not using cash, and for changes in working capital accounts. The result is cash flow from operations.

Some firms use the direct approach to present cash flow from operations, listing all revenues that provide cash and subtracting all expenses that use cash. Firms using this direct approach must also present a reconciliation of net income to cash flow from operations. The cash flows from investing activities and financing activities appear after cash flow from operations.

Interpreting a statement of cash flows requires an understanding of the economic characteristics of the industries in which a firm conducts its activities, including capital intensity, growth characteristics, and similar factors.