The Statement of Cash Flow - Essay Example

A company is also required to prepare the statement as an alternative tool for measuring profitability especially for the profit-making companies in the instances when accrual standards of accounting may not be representatives of economic realities. Besides, it illustrates the quality of income where income is interpreted to be of low quality when net income contains many non-cash items (Kousenidis, 2006).

Finally, the statement is instrumental in the evaluation of risks in financial products such as the evaluation of default risk in the company. It is to be acknowledged that an operating company has various ways through which cash is produced while at the same time having various ways through which it spends the funds produced. This, therefore, explains why a cash flow document contains three main sections where sections on financing and operations indicate the manners in which funds are generated and the section on investment illustrates how funds are utilized (Stoddard, 2013).

The cash flow statement comprises three main sections, which are strategic and critical for its essence to a company. The three sections within a cash flow statement are cash flows emanating from operating activities for the company, flows of cash from activities of investments as well a section on flows of cash from financing activities. Cash flow from the operations section is a fundamental section within the statement as it outlines gains realized from the activities of the company where changes in the flow would be useful in explaining the performances of a company.

The amount that companies invest in capital expenditures is the main component illustrated in the investment section while finance sourcing activities especially from outside are reflected in the section on financing activities (Wise, 2006).