General Accounting- Essence of Cash Flows Statement

One of the most important bookkeeping or accounting topics is the preparation of financial statements. Cash Flows Statement is an important financial statement which is prepared as per the activities of business and it furnishes details of cash receipt sources and cash major uses for the particular accounting time period. Income Statement and Balance Sheet don’t offer these details. To know more visit www.bls-dubai.com

Essence of Cash Flows Statement

Preparation of financial statement relies on the accrual principle, which implies that income and expenditures are perceived regardless of whether cash was received or paid. Hence business can be productive; however, have no cash because of poor capacity to create adequate cash inflow.

Balance Sheet provides only cash balance at the end of every bookkeeping period and no details how this balance was gathered are provided. That is the reason Cash Flows Statement is essential since it gives points of interest how cash balance changed over the bookkeeping time frame and what was the principal purposes behind such change.

This statement has 3 main components that specify changes in cash into main types which are called activities. These are:

  • Operation Activities – inflows or payment associated with the general functions of the business (i.e. sales of merchandise, provision of administrations)
  • Investing Activities – inflows or payment associated with the investment activities (i.e. sale or purchase of plant assets and alternative non-current assets)
  • Financing Activities – inflows or payment associated with the funding activities (i.e. receipt or reimbursement of loans, payment of dividends)

Insights

From the practical perspective it is essential that business creates adequate cash from its main activities, So Operating Activities part is critical. In the event that the balance in this part is negative, the business for the accounting or bookkeeping time frame was not ready to general adequate cash from its main activities and likely business operations were supported by money received from finance or funding activities.

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