Chapter 13, Problem 1Q

To determine

Cash Flow statement: The statement which summarizes the net amount of cash disbursed and received in a particular activity is called cash flow statement.

Determine the purpose of the cash flow statement.

Answer to Problem 1Q

Solution: The cash flow statement is prepared to study the net cash position of the company. It forms an integral part of the annual financial report.

Explanation of Solution

Cash flow statement is a report that shows the net cash inflows and outflows due to the company’s business operations and thus represents the liquidity position of the company. Various business activities are divided into Operating, Investing and Financial activities and the cash inflows and outflows under these broad headings are classified.

It thus shows how the company manages its cash liquidity.

Broad purposed can be enumerated as below −

• Used to calculate the accounts receivables turnover − that is how fast the cash is received from the debtors.
• Used to calculate the accounts payables turnover − that is how fast is the cash paid to the vendors to reduce the net outstanding.
• Used to calculate the net change in the opening cash and the closing cash balance during the year.
• Used to calculate how much of the inventory is converted into real cash as compared to previous year’s cash flow statement.

Conclusion

The purposes of the cash flow statement are thus briefly summarized.