Definition of Cash Flow Statement
What is a Cash Flow Statement?
A financial statement that shows how cash enters and leaves a business during a period of time
What is the main purpose of the cash statement?
To show how cash is generated and used by a business
Give one advantage of preparing a cash flow statement
It helps determine liquidity and solvency
Give one disadvantage of the cash flow statement
it ignores non-cash items like depreciation
Why is it important for a business to prepare a cash flow statement at the end of each accounting period?
It shows how cash is generated and used, helping managers assess liquidity and financial stability
What are the three sections of a cash flow statement?
Operating, Investing, and Financing activities.
How does the cash flow statement help management?
It helps plan for future cash needs and avoid shortages
How can a cash flow statement help in budgeting?
It helps predict when cash will be available for use
Why can the cash flow statement be misleading?
Because a positive cash flow statement doesn't always mean profitability
What type of activity would the purchase of equipment fall under?
Investing activity
Why is a cash flow statement different from an income statement?
The cash flow statement records actual cash movement, not profit
Why is the cash flow statement useful to investors?
It helps them evaluate the business's ability to generate future cash
Why is the cash flow statement easier for non-accountants to understand?
It focuses only on cash movement, not accounting adjustments
What is a limitation when comparing cash flows between companies?
Differences in accounting policies and timing
What type of activity is paying wages or rent?
Operating activity
What does a positive cash flow indicate?
That a business is generating more cash than it is spending
How does a cash flow statement support decision-making?
By showing whether the business can meet short-term obligations
How can it help detect cash problems early?
By showing patterns of negative cash flow over time
Why might a business with strong profits still have poor cash flow?
Because of high credit sales or unpaid debts
What type of activity is taking out a bank loan?
Financing activity
Why is depreciation not included in a cash flow statement?
Because depreciation is a non-cash expense
What does cash flow from financing show?
Cash transactions related to owners and creditors (e.g., loans, capital)
How does the cash flow statement improve communication with lenders?
It provides evidence of the business's ability to repay loans
Why can the cash flow statement not replace the income statement?
It shows liquidity, not profit performance
Why is it useful to practice preparing a cash flow statement using a real example?
It helps apply theoretical knowledge to real financial data