Question

What is the reporting purpose of the statement of cash flows? Identify at least two questions that this statement can answer.

Short answer

The main objective of the statement of cash flows is to indicate the total cash inflows or receipts and total cash outflows or payment for the particular accounting period.

What are the sources of cash receipts? And what are the cash spending, are answered by the statement of ash flows.

Step-by-step solution

Explanation on reporting purpose

At the end of the financial year, a statement of cash flow is prepared to show changes in cash balance over the course of the year. We now understand where the money came from and where it went. We can easily understand the company's cash position.

Questions addressed by cash flow statement

The other questions that cash flow can help us answer include

• Explanation on change in cash balance.
• Reason for difference in net income and cash flows.
• Amount paid for dividends
• Identifying any cash shortage.