Cash Flow Statement – Essay Example
The paper "Cash Flow Statement" is a great example of an essay on finance and accounting.
Cash flow statement is one of the financial statements that business organizations prepare at the end of accounting periods. One of the statement’s usefulness is its ability to inform stakeholders of an organization’s future ability to generate cash inflow. It also helps to predict an organization’s future ability to “pay dividends and meet its obligations” because such payments can only be possible from cash inflows that the statement shows (Kimmel, Weygandt, & Kieso 2010, p. 624). The statement is also useful in helping stakeholders to understand the causes of possible differences between net income and derived cash from operating activities, and to evaluate not operational transactions (625). Stakeholders can also use the statement to understand the ratio of debt and owners’ equity and associated changes over time (Khan & Jain 2007, p. 5.5).
The different financial statement relates to each other. Cash flow statement, for example, relates to the income statement in that the two measure cash, though from different perspectives. Cash flow statement measures the real movement of cash while income statement measures cash on an accrual basis (Wahlen, Baginski, & Bradshaw 2010, p. 155). The fact that changes in values in the statement of financial position influences cash flow statement establishes a relationship between the two. Increase in value of fixed assets, for example, results in cash outflow in cash flow statement (Golin & Delhaise 2013, n.p.).
The main advantage of the direct method for income statement is its direct reporting of “cash receipts and cash payments” and this makes it simple to understand (Warren, Reeve, & Duchac 2013, p. 644). The advantage of the indirect method is its reconciliation of the “difference between net income and net cash flow from operating activities” (644).