Post by wisdom1 on Oct 30, 2014 19:45:59 GMT
This is another part of the financial statements which helps to assess an entity’s Investing, Financing and Operating activities. Most investors (existing and potential shareholders) believe that a company is ‘performing’ if the annual report shows profit for the year, meanwhile, this is not the only factor to assess the performance and efficiency of an entity. It should be noted that, profit shown in the statement of profit or loss and other comprehensive income:
a. May not reflect the actual profit for the year because of manipulation by the management;
b. Is not an indication of availability of cash to pay dividend to shareholders;
c. Does not indicate the availability of cash to increase wages and salaries of workers;
d. Is not an evidence of sufficient cash to meet short and longer term financial commitment as they fall due.
Therefore, a thorough and further assessment is expected from the shareholders. This means that, a financial statement is incomplete if additional information on the points listed above are not available.
A statement of cash flows is a statement prepared to show the differences between liquidity and profitability. It unveils cash movements ( in and out ) of an entity during a particular period of account. A statement of cash flow reveals various sources of cash and the uses ( or application ) of cash during the period. Some of the sources of cash are :
a. Sales
b. Proceeds from the issue of Loan and other debt instruments
c. Cash receipt from the disposal of investment
d. Cash receipts from disposal of non current assets etc.
Uses of cash:
a. Cash payment to suppliers for goods and services
b. Cash payment for the purchase of non current assets
c. Payment of dividend and interest
d. Loan redemption etc.
DEFINITION OF KEY TERMS
1. CASH : Comprises cash on hand and demand deposits
2. CASH EQUIVALENT: Are short term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant risk of change in value. For any investment to fulfill the above definition the investment’s maturity date should normally be within three months from its acquisition date.
3. CASH FLOWS: are inflows and outflows of cash and cash equivalent
4. OPERATING ACTIVITIES : are the principal revenue producing activities of the entity and other activities that are not investing or financing activities.
5. INVESTING ACTIVITIES : Are the acquisition and disposal of non current assets and other investments not included in cash equivalents.
6. FINANCING ACTIVITIES : Are activities that result in changes in the size and composition of the equity capital and borrowings of the entity.
IAS 7 recommends two methods of preparing and presenting statement of cash flows. These methods are :
Indirect method
Direct method
DIRECT METHOD
This method is very simple and straight forward. It is best used when cash or bank account are presented as part of additional information. The items or transactions relating to cash movements during the accounting period can be easily traced to the cash and/or bank accounts( or summary )
a. May not reflect the actual profit for the year because of manipulation by the management;
b. Is not an indication of availability of cash to pay dividend to shareholders;
c. Does not indicate the availability of cash to increase wages and salaries of workers;
d. Is not an evidence of sufficient cash to meet short and longer term financial commitment as they fall due.
Therefore, a thorough and further assessment is expected from the shareholders. This means that, a financial statement is incomplete if additional information on the points listed above are not available.
A statement of cash flows is a statement prepared to show the differences between liquidity and profitability. It unveils cash movements ( in and out ) of an entity during a particular period of account. A statement of cash flow reveals various sources of cash and the uses ( or application ) of cash during the period. Some of the sources of cash are :
a. Sales
b. Proceeds from the issue of Loan and other debt instruments
c. Cash receipt from the disposal of investment
d. Cash receipts from disposal of non current assets etc.
Uses of cash:
a. Cash payment to suppliers for goods and services
b. Cash payment for the purchase of non current assets
c. Payment of dividend and interest
d. Loan redemption etc.
DEFINITION OF KEY TERMS
1. CASH : Comprises cash on hand and demand deposits
2. CASH EQUIVALENT: Are short term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant risk of change in value. For any investment to fulfill the above definition the investment’s maturity date should normally be within three months from its acquisition date.
3. CASH FLOWS: are inflows and outflows of cash and cash equivalent
4. OPERATING ACTIVITIES : are the principal revenue producing activities of the entity and other activities that are not investing or financing activities.
5. INVESTING ACTIVITIES : Are the acquisition and disposal of non current assets and other investments not included in cash equivalents.
6. FINANCING ACTIVITIES : Are activities that result in changes in the size and composition of the equity capital and borrowings of the entity.
IAS 7 recommends two methods of preparing and presenting statement of cash flows. These methods are :
Indirect method
Direct method
DIRECT METHOD
This method is very simple and straight forward. It is best used when cash or bank account are presented as part of additional information. The items or transactions relating to cash movements during the accounting period can be easily traced to the cash and/or bank accounts( or summary )