Measuring and reporting Cash Flows
4 important questions on Measuring and reporting Cash Flows
The need for a statement of cash flows
- The statement of cash flows is specifically designed to reveal movemets in cash over a period.
Cash movement cannot be readily detected from the income statement, which focuses and expenses rather than on cash inflows and outflow.
- Profit (or loss) and cash generated for the period are rarely equal.
- The statement of cash flows is major financial statement, along with the income statement and the statement of financial position.
Preparing the statement of cash flows
- The total of the cash movements under these three categories will provide the net increase of decrease in cash and cash equivalents for the period.
- A reconciling can be undertaken to check that the opening balance of cash and cash equivalent plus the net increase (or decrease) for the period equials the closing balance.
Calculation the cash generated from operations
- The direct method is based on an analysis of the cash records for the period. Whereas the indirect method uses information contained within the income statement and statement of financial position.
- The indirect method takes the operating profit for the period, adds back any depreciation charge and then adjusts for changes in inventories, receivables and payables during the period.
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Interpreting the statement of cash flows
- Tracking the cash movements over several periods may reveal financing and investing and may help predict future management action.
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