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In 200 words or more What is the relevance of the statement of cash flows? How...

In 200 words or more What is the relevance of the statement of cash flows? How are the balance sheet and income statement used to prepare the statement of cash flows? Give an example

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Answer #1

The statement of cash flows is very important because it shows how much actual cash a company has generated in a given period. The income statement, on the other hand, often includes noncash revenues or expenses, which the statement of cash flows excludes.

The difference lies in a concept called accrual accounting. According to this principle, companies record revenues and expenses when the actual transaction occurs, not when the cash is exchanged. This makes it difficult to figure out the actual cash generated. The cash flow helps in this regard, while also segregating the activities generating this cash (operating, financing and investing activities).

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