Chapter 16, Problem 1DQ

To determine

Introduction:

The statement of cash flows is prepared for analysis and reporting purposes of cash transactions of a company during the period. It mainly uses three sections for reporting cash inflows and outflows, namely cash flows from operating, investing and financing activities respectively.

To find solutions to the business challenges with the help of the statement of cash flows of a company respectively.

Answer to Problem 1DQ

Solution:

The main purpose of the statement of cash flows is to provide information about cash inflows and cash outflows resulting from the operating, investing and financing activities of a company during the period.Also, it helps in planning the repayment of loans, replacement of fixed assets and other long-term plans for business expansion. Thus, it is vital for capital budgeting decisions.

Explanation of Solution

The reporting purpose of the statement of cash flows can answerthe following questions as explained below:

1. Net change in cash flows from operating, investing and financing activities- The management keeps a track of the cash flows resulting from the operating, investing and financing activities during the period. This helps to maintain and expand the company's on-goingbusiness operationsby obtaining required loans, arranging finances for production and inventory management, allocation of funds for marketing and advertising of the product and so on.
2. Capital budgeting decisions- The statement of cash flows helps in planning the repayment of loans, replacement of fixed assets and other similar long-term plans for business expansion. The long-term projects of a company involve investments in capital assets, project financing, and generating cash inflows over the life of such project, which is pre-planned and analyzed by the management using capital budgeting techniques.

Conclusion

Thus, we conclude that the managementfindssolutions to the business challenges with the help of the statement of cash flows of a company respectively.