Question: Most organizations prepare 4 financial statements for external reporting purposes: income statement, balance sheet, statement of owners’ equity, and statement of cash flows. Financial accounting courses cover the initially three statements in detail and also regularly carry out a review of the statement of cash flows. This chapter will focus on preparing the statement of cash flows and also on making use of the resulting cash flow indevelopment for analytical functions. What indevelopment is provided in the statement of cash flows?

 

Answer: The statement of cash flowsA financial statement that gives cash receipt and cash payment indevelopment and also explains the change in cash for a duration of time. provides cash receipt and also cash payment indevelopment and reconciles the adjust in cash for a duration of time. Cash receipts and also cash payments are summarized and categorized as operating, investing, or financing activities. Ssuggest put, the statement of cash flows indicates wbelow cash came from and also wright here cash went for a period of time.

You are watching: The primary purpose of the statement of cash flows is to provide information

Assume you save track of your individual cash transactions for a whole year in a examine register (e.g., checks written and also payexamine deposits) and intend you have thousands of transactions for the year. Rather than mirroring eincredibly single transactivity in a formal report, the statement of cash flows summarizes these transactions. For example, all cash receipts from paychecks are included together and presented as one line item, all cash payments for rent are added together and also displayed as one line item, all cash payments for food are added together and presented as one line item, and so on. The goal is to begin with the start of the year cash balance, add all cash receipts for the year, subtract all cash payments for the year, and also find the resulting end-of-year cash balance. Although the formal statement of cash flows is not quite this simple, the principle is the very same.

 

Question: Why did the Financial Accounting Standards Board (FASB) create the statement of cash flows in 1987?

 

Answer: The statement of cash flows was created because of a absence of cash flow indevelopment on the income statement, balance sheet, and statement of owners’ equity. The revenue statement reflects revenues and also prices making use of the accrual basis of accountancy, however it does not show just how much cash was obtained for earnings or phelp for costs. The balance sheet reflects assets, liabilities, and also owners’ equity at a point in time, however it does not display just how much cash was received or passist for these items. The only cash information provided on these statements is the readjust in cash from the end of last period to the finish of the existing period acquired from the cash line item on the balance sheet (often called cash and also cash equivalents).

Owners, creditors, and supervisors wanted even more cash flow indevelopment. They frequently asked such questions as: Why did cash go down? How much cash was received regarded net income? How much cash was phelp for the purchase of equipment? How much cash was got from issuing bonds? As an outcome of the demand also for more cash flow indevelopment, the FASB formally developed the statement of cash flows in 1987 (Statement of Financial Accounting Standard No. 95, which deserve to be uncovered at http://www.fasb.org). Most suppliers are now required to prepare the statement of cash flows in addition to the other three statements. We begin the process of explaining just how to prepare this statement in the next section.

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Company in Action 12.1

Cash Flows at Southwest Airlines

Southwest Airlines remained in the enviable position of generating $1,600,000,000 in cash from operating tasks for the year finished December 31, 2010. However, cash on the balance sheet only raised $147,000,000 for the same duration. Why did total cash go up by such a small amount compared to the $1,600,000,000 increase in cash from operating activities? The statement of cash flows gives the information necessary to answer this question. Southwest invested $493,000,000 on property and tools (planes, components, and so on.) and also $155,000,000 to pay off long-term debt. Southwest also purchased $772,000,000 in short-lived investments.


Key Takeaway

The statement of cash flows provides cash receipt and also cash payment information and reconciles the change in cash for a duration of time. The major purpose of the statement is to display what resulted in the adjust in cash from the beginning of the duration to the finish of the duration.

Recheck out Problem 12.1

Describe the purpose of the statement of cash flows. Why did the FASB develop the statement of cash flows?

Solution to Resee Problem 12.1

The function of the statement of cash flows is to provide a summary of cash receipt and cash payment information for a duration of time and also to reconcile the distinction between beginning and also finishing cash balances shown on the balance sheet. The statement of cash flows clarifies just how cash was produced and just how cash was offered for a duration of time. The FASB developed the statement of cash flows bereason owners, creditors, managers, and various other stakeholders wanted even more indevelopment about cash receipts and also cash expenditures. Although the balance sheet shows cash balances at the end of each duration, no further information is offered on the balance sheet, earnings statement, or statement of owners’ equity regarding cash flow tasks. The statement of cash flows takes treatment of this difficulty.