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Statement of Cash Flows
Statement of Cash Flows
It provides information about the cash receipts and cash payments of an entity during a period.
It is a formal statement that classifies cash receipts (inflows) and cash payments (outflows) into
operating, investing and financing activities.
This statement shows the net increase or decrease in cash during the period and the cash balance
at the end of the period; it also helps project the future net cash flows of the entity.
Each item in the statement helps explain why cash changed by the amount it did during the period.
Importance – SCF helps the owner see if their revenues are actually translated to cash collection
or if they have enough cash inflows to pay any maturing obligations.
EXAMPLES:
a) Expenses and charges are added to the profit as it did not entail cash payments.
b) Increases in current assets and decreases in current liabilities are subtracted from
the profit.
Example: Increases in A/R from sale of goods represented an increase in profit
without corresponding increase in cash – for it is still a receivable. Since these
revenues are already included in the computation of profit, the increase in A/R
should be deducted from the profit figure.
c) Decreases in current assets and increases in current liabilities are added to profit.
Example: Increase in salaries payable meant that the entity did not pay the full
amount of salaries expense. The expense in the income statement, for cash flow
purposes is overstated by the amount of unpaid salaries. If expense is overstated,
then profit is understated by the same amount, hence, the increase in current
liability is added to profit.
Profit XX
Adjustments for:
Noncash expense (depreciation) XX
Increases in current asset (XX)
Decreases in Current Asset XX
Increases in current liability XX
Decreases in current liability (XX)
Cash Flows from Operating Activities P XXX