Statement of Cash Flows - Assignment Example

Importance of ment of Cash Flows Importance of ment of Cash Flows Public firms are required to prepare annual financial reports, which shows their financial positions. Among the statements that must be prepared is the statement of cash flows. Since cash is the lifeblood of any firm and is crucial to the success of any business, the statement of cash flow is a vital source of information. A cash flow statement attempts to answer how a firm used and generated cash during the fiscal period (Harrison, Horngren, & Thomas, 2013).

This information is critical to users as it helps them access a particular firm’s ability to generate cash in future. Creditors can also use this statement to establish the credit worthiness of a company within a particular period. A firm with a healthy cash flow is characterized by the cash generated from operating activities (Needles & Powers, 2013). Even though income statements and balance sheets are used to establish a firm’s performance and heath (Harrison, Horngren, & Thomas, 2013), it is still imperative that firms prepare the statement of cash flow.

For instance, shareholders need the statement of cash flows to check the adequacy of cash flow as a sign of the firm’s ability to pay dividends and expand its operations. Cash flow statement is used for short and long-term financial planning since it explains the reasons for a deficit or surplus in a firm’s liquidity position at the end of a particular period (Harrison, Horngren, & Thomas, 2013). Furthermore, a cash flow statement is mainly based on the actual cash concept; thus it is a critical tool for liquidity analysis of a company (Rich, Jones, Mowen, & Hansen, 2013).

Users of the company’s annual financial reports can get a glance of the liquidity position of the company by looking at the statement of cash flows. This statement also helps in streamlining a company’s internal financial management by providing information on the cash flow analysis of the company. Finally, the cash flow statement assists users of the annual financial report to examine the relationship between profitability, profits and the net cash flows of the company for a particular period (Mohana, 2013).

References Harrison, W. T., Horngren, C. T., & Thomas, C. W. (2013). Financial Accounting. New York: Pearson.Mohana, R. P. (2013). Financial Statement Analysis and Reporting. Patparganj, Delhi: PHI Learning Pvt. Ltd.Needles, B., & Powers, M. (2013). Principles of Financial Accounting. Boston: Cengage Learning.Rich, J., Jones, J., Mowen, M., & Hansen, D. (2013). Cornerstones of Financial Accounting. Boston: Cengage Learning.