Question

• What types of useful information is provided by the statement of cash flows?

• The statement of cash flows separates cash receipts and payments into three classifications. What are these three classifications and how do they differ?

• Of the three classifications of cash receipts and payments, which one should always be positive and why?

Answer 1

• What types of useful information is provided by the statement of cash flows?

Answer; They say that sales are vanity, profits are sanity and only cash is the reality. It follows therefore that the cash flow statement is a very important financial statement.
The main purpose of the statement of cash flows is to provide information about the cash inflows and cash outflows of a business during the reporting period. All the users of the financial statements , e.g. investors, lenders, suppliers, employees and managers are interested to know about the ability or inability of the enterprise to generate positive cash flows. The cash flow statement enables the stakeholders of the a company to evaluate its liquidity, financial flexibility, profitability and risk. The cash flow statement gives the following information about a firm, which the Income Statement or the Balance Sheet are unable to do :
a. The ability of the firm to generate favorable net cash flows.
b. The ability of the firm to meet its financial obligations, and the extent to which it depends on external financing.
c. The ability of the firm to pay dividends to the stockholders.
d. The causes for difference between the net income and the cash flows from operating activities ( A highly profitable company may be facing severe cash shortages)

The statement of cash flows separates cash receipts and cash payments into:
1. Cash flows from Operating Activities.
2. Cash flows from Investing Activities and
3. Cash flows from Financing Activities.

Of the three classifications of cash receipts and payments, which one should always be positive and why?

Of the above three cash flows, cash flows from operating activities should always be positive, else it is indicative of poor working capital management, which can lead to liquidity problems for the firm, culminating ultimately in bankruptcy.