Statement of Cash Flow
A cash flow statement is a financial statement that provides a detailed and summarized explanation of the changes in a company’s cash during a certain period by showing a company’s sources and uses of cash during a particular period. This statements main aim is to list the various items that are responsible for the changes in cash balances between two periods in a balance sheet. All items that either reduce or increase the cash in a company are all included in this statement (Bodie, Kane, and Marcus, 2004).
When preparing a cash flow statement, the main focus is on cash not the working capital. This statement is of great use to the management and directors of the company. It’s not of much use to the external users.
The major difference between the two methods i.e. the direct and the indirect methods is the way the first section of the cash flow statement that involves the cash flow from operating activities is written. The other sections involving cash flow from investing and financing activities are actually similar. When using the direct method the cash flow from operations or operating activities includes also the amounts such as the cash received from debtors or customers and cash paid to creditors or suppliers. (Khan, 1993) The indirect method shows the net income that’s followed by adjustments that’s needed to convert total net income to cash amount from the operating activities. The direct method has to provide a statement of reconciliation of net income to the amount of cash provided by the operating activities. In the indirect method the adjustment are done inside the cash flow statement and the reconciliation statement is not required. Most companies use the indirect method of cash flow preparations. (Helfert, 2001).
Distinguish between cash flows from operating activities and cash flows from investing activities.
The cash inflow from the operating activities includes receipts from customers for provision of goods and services, cash received from interest and also the dividend income. It also includes all the proceeds all the sales of trading securities. Cash outflows include all the payments for inventory. The trading securities, salaries and wages, all taxes and payable interest and all other normal expenses incurred by the business. Cash flows from the operating activities is linked to all transactions and events that qualify for into the determination of the business income. (Wild, 2008)
Compare the statement of cash flows with income statement using terms of net income and cash at end of the year.
The income statement is a document that is prepared to determine if a company is making profit or loss for a given period of time. The time frame is normally the financial period of the company, i.e. it can be a year, a month or even daily. The income statement is prepared by listing all the revenues including sales within a specific time interval and also the expenses within that particular period. The total expenses is then deducted from the total revenues to the Earnings Before taxes i.e. EBT. To arrive at the Net income, all the total income taxes are calculated and deducted from the Earnings before Taxes. (Epstein and Jermakowicz, 2007).
The cash flow statement is a financial document that’s used to portray the movement of cash either to or from the business. Business owners utilize the cash flow statement to determine when they will need extra funding or opt for a loan for their business expansion or to meet other needs. The cash balance at the end of the cash flow statement = Cash at the beginning + Net Cash flow from operating (income statement cash items) + Net Cash flow from financing ( e.g. proceeds from bond sales, loan repayment or the payment of dividends) + Net Cash flow from the investing activities(for example Sale or purchase of assets)
Which of the two financial statements (income statement and statement of cash flows) is the better one? Explain your reasoning.
Both statements are important depending on the need of the users of the information. Investors would be interested to know where the cash from the financing activities have come from and how they have been used. On other hand, shareholders would be very much interested in knowing the dividends payable to them and these would be available in the appropriation part of the income statement. The income statement shows the revenue expenditure and income for the year ended 31st Dec. It shows revenue items only. The main purpose of preparing the income statement is to determine the profit or loss made for a particular trading period. (Vance, 2003)
The cash flow statement is a financial statement that explains the changes in a company’s cash for a particular period. The statement targets to list all the items that bring changes to a company’s cash balances for a certain period of time. The main reason of preparing cash flow statement is to identify the major sources and the use of cash. Also to find out the areas that needs attention in a business. (Helfert, 2001).
The main items in the income statement are the gross revenue and the cost of goods sold. When these two are deducted then it gives the total gross profits for the firm. The main items in the cash flow statement are the opening balance and the closing balance. The differences between them, display the changes in financial position between the two accounting period.
Comment on differences between Apple’s and Samsung’s statement of cash flows.
The net increase in cash and cash equivalents in the year 2012 decreased by 16% from the previous year i.e. 2011 for Samsung electronics. Apple Inc had a negative balance for cash and cash equivalent changes in the year 2011 while in the year 2012 it rose to $931000. The year 2012 and 2011 for Apple Inc in investing activities were all in excess or negative or in deficit.
The same case was for Samsung Electronics. The net cash that Samsung generated from operating activities increased by 66% in the year 2012 from the previous year i.e. 2011. Apple Inc total cash flow from operating activities in the year 2012 increased by 36% from the year 2011.
Helfert, A. (2001). The Nature of Financial Statements: The Cash Flow Statement.
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