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The primary purpose of the statement of cash flows is to provide information about a company’s cash receipts and cash payments during an accounting period. A secondary purpose is to provide information about a company’s operating, investing, and financing activities during the accounting period. Some information about those activities may be inferred from other financial statements, but the statement of cash flows summarizes all transactions that affect cash. The statement of cash flows is useful to management, as well as to investors and creditors. • Management uses the statement of cash flows to assess liquidity, to determine dividend policy, and to evaluate the effects of major policy decisions involving investments and financing. Examples include determining if short-term financing is needed to pay current liabilities, deciding whether to raise or lower dividends, and planning for investing and financing needs. • Investors and creditors use the statement to assess a company’s ability to manage cash flows, to generate positive future cash flows, to pay its liabilities, to pay dividends and interest, and to anticipate its need for additional financing. The statement of cash flows has three major classifications: operating, investing, and financing activities. 1. Operating activities involve the cash inflows and outflows from activities that enter into the determination of net income. Cash inflows in this category include cash receipts from the sale of goods and services and from the sale of trading securities. Trading securities are a type of marketable security that a company buys and sells for the purpose of making a profit in the near term. Cash inflows also include interest and dividends received on loans and investments. Cash outflows include cash payments for wages, inventory, expenses, interest, taxes, and the purchase of trading securities. In effect, accrual-based income from the income statement is changed to reflect cash flows. 2. Investing activities involve the acquisition and sale of property, plant, and equipment and other long-term assets, including long-term investments. They also involve the acquisition and sale of short-term marketable securities, other than trading securities, and the making and collecting of loans. Cash inflows include the cash received from selling marketable securities and long-term assets and from collecting on loans. Cash outflows include the cash expended on purchasing these securities and assets and the cash lent to borrowers. 3. Financing activities involve obtaining resources from stockholders and providing them with a return on their investments and obtaining resources from creditors and repaying the amounts borrowed or otherwise settling the obligations. Cash inflows include the proceeds from stock issues and from short- and long-term borrowing. Cash outflows include the repayments of loans (excluding interest) and payments to owners, including cash dividends. Treasury stock transactions are also considered financing activities. Repayments of accounts payable or accrued liabilities are not considered repayments of loans; they are classified as cash outflows under operating activities. Classof1.com offers Financial Accounting Assignment Help
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