What is the purpose of the statement of cash flow What guida

What is the purpose of the statement of cash flow? What guidance does Statement NO. 95 set forth about the preparation of a statement of cash flow? What are the guidelines for one to distinguish among operating, investing and financing activities?

Your answer should follow the scoring guide and be at least 250 words in length.

Solution

Cash flow statements

A cash flow statement is the financial statement that measures the cash generated or used by a company in a given period.

A cash flow statement typically helps to find out the various sources of funds the corporation is having. There are three main categories in cash flow statement from which the funds are procured or accumulated. These are cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities. Cash flow is not same as the net income, which includes transactions that did not involve actual transfers of money

Statement of Financial Accounting Standards No. 95—Statement of Cash Flows. FASB 95 requires that a full set of financial statements includes a cash flow statement as the fourth required financial statement along with a balance sheet, income statement, and statement of retained earnings. This statement established standards for cash flow reporting, and superseded the Accounting Principles Board (APB) Opinion No. 19, Reporting Changes in Financial Position.

APB Opinion No. 19, adopted in March 1971, had permitted, but did not require, enterprises to report cash flow information in a statement of changes in financial position, also commonly known as a funds statement. There was no required format or universally accepted definitions for categories in the statement, however, and the term \"funds\" itself was not sufficiently defined. Hence, the statement referred to changes in funds, but what constituted those funds differed across companies. Among the ambiguities, some firms defined funds as cash, some used cash and short-term investments, some used quick assets, and some used working capital.

While it was widely recognized that the funds statement provided valuable and relevant information, the lack of consistency in format and focus from one firm to another was part of the reason that the FASB eventually took up the matter and, with extensive commentary from accountants and other interested parties, adopted the standards espoused in FASB 95. The standard, which took effect in 1988, discouraged use of the word \"funds\" in cash flow statements because the term had been cl6aked in so much ambiguity.

Guidelines :

FASB 95 requires that a statement of cash flows classify cash receipts and payments according to whether they stem from operating, investing, or financing activities. It also provides that the statement of cash flows may be prepared under either the direct or indirect method, and provides examples of how to prepare statements using each method.

Under the FASB standard, the core concept, cash, is defined as \"cash and cash equivalents.\" Cash includes currency and bank deposits, whereas cash equivalents include other highly liquid investments like U.S. Treasury bills, money market accounts, and commercial paper. Other sorts of investments such as stocks, bonds, futures contracts, and so forth are not considered cash.

Cash flow from Operating activities reflects Flow of funds from day to day activity are called funds from operating activities. As we know working capital is a component of cash flow from operations, investors should be aware that companies can influence cash flow by lengthening the time they take to pay the bills which will prevent cash to flow, or shortening the time it takes to collect what’s owed to them leads to the receipt of cash, and putting off buying inventory.

Cash flow from investing activities reflects any cash that the company gets or uses for sales of capital assets that is, assets with a useful life of more than one year that appear on the balance sheet or purchase of assets. It is important to note that companies have some leeway about what items are or are not considered capital expenditures, and the investor should be aware of this when comparing the cash flow of different companies.

Cash flow from financing activities reflect the company\'s purchase or sale of stock and any proceeds from or payments on debt financing. The measure varies with the different capital structures, dividend policies, or debt terms companies may have.