Chapter 12, Problem 1DQ

What is the reporting purpose of the statement of cash flows? Identify at least two questions that this statement can answer.

Summary Introduction

Concept Introduction:

The statement of cash flows is one of the financial statements. This statement is prepared at the end of a particular period to know the cash flows of the business. The statement is prepared using the direct or indirect method. 

To indicate: the reporting purpose of the statement of cash flows.

Explanation of Solution

Financial statements are prepared at the end of the accounting period to know the financial position of the business. The statement of cash flows is one of the four financial statements; income statement, balance sheet, statement of owner’s equity, and statement of cash flows. The statement of cash flows is prepared to know the cash flow position of the business. The statement shows cash flows under three different types of business activities; operating activities, investing activities, and financing activities. The operating activities section of the statement can be prepared using the direct or indirect method. Two questions indicating the purpose of the statement of cash flows are as follows:

1. What is the net operating cash inflow or outflow of the business?

2. What is the net change in the cash balance during the period?