Acc291
Week 7 Checkpoint
Cash Flow
Companies use a statement of cash flows because it shows where cash came from and how it was used. The other main financial reports only provide a limited insight into the cash transactions of the company. While the other main reports utilize the accrual accounting basis, the statement of cash flows changes the accrual basis using the direct or indirect method. The indirect method is primarily used, however both are acceptable under generally accepted accounting principles. The statement of cash flows is divided into three sections and shown in the report in the following order. Operating activities is reported first, followed by investing activities, and finally financing activities. Operating activities deals with each transaction that involves both revenues and expenses. This category is considered important because operating activities are the best predictor of a company’s ability to generate future cash. This obviously is important information for investors as well as creditors when evaluating a company’s ability to grow and move forward. Investors can make educated guesses regarding the future cash flows based on the statement of cash flows better than viewing the other financial reports that utilize the accrual accounting basis. Investing activities include the transactions to purchase, sell, or dispose of company property. Loans and debt collection are also included in the investing activities with company plant and equipment. Investors can view the statement of cash flows to see if the company has sufficient cash on hand to pay stockholder dividends and meet future demands. Finally, financing activities includes receiving cash from stockholders, buying back company stock, and paying dividends.
Cash Flow
Companies use a statement of cash flows because it shows where cash came from and how it was used. The other main financial reports only provide a limited insight into the cash transactions of the company. While the other main reports utilize the accrual accounting basis, the statement of cash flows changes the accrual basis using the direct or indirect method. The indirect method is primarily used, however both are acceptable under generally accepted accounting principles. The statement of cash flows is divided into three sections and shown in the report in the following order. Operating activities is reported first, followed by investing activities, and finally financing activities. Operating activities deals with each transaction that involves both revenues and expenses. This category is considered important because operating activities are the best predictor of a company’s ability to generate future cash. This obviously is important information for investors as well as creditors when evaluating a company’s ability to grow and move forward. Investors can make educated guesses regarding the future cash flows based on the statement of cash flows better than viewing the other financial reports that utilize the accrual accounting basis. Investing activities include the transactions to purchase, sell, or dispose of company property. Loans and debt collection are also included in the investing activities with company plant and equipment. Investors can view the statement of cash flows to see if the company has sufficient cash on hand to pay stockholder dividends and meet future demands. Finally, financing activities includes receiving cash from stockholders, buying back company stock, and paying dividends.