● shows where cash originated from (receipts) and how cash was spent (payments). ● reports why cash decreased or increased during the period. The statement of cash flows explains why net income as reported on the income statement does not equal the change in the money balance. In essence, the cash flow statement is the communicating hyperlink between the accrual based income declaration and the cash reported on the total amount sheet.

1. predict future cash moves. Past cash receipts and obligations help predict future cash flows. 2. evaluate management decisions. Wise investment decisions help the business enterprise prosper, while unwise decisions cause the business enterprise to have problems. Investors and creditors use cashflow information to judge managers’ decisions. 3. predict ability to pay dividends and debts. Lenders want to know whether they will gather on their loans.

Stockholders want dividends on the investments. The declaration of cash flows helps make these predictions. On the declaration of cash moves, Cash means cash on hand and cash in the bank or investment company, and cash equivalents, which are highly liquid investments that can be converted into cash in 90 days or less. As the name indicates, cash equivalents are so near to cash that they are treated as “equals.” Types of cash equivalents are money-market accounts and investments in U.S.

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Each section reports cash flows coming into the business and cash moves going out of the company based on these three divisions. ● The direct method restates the income declaration in terms of cash. The immediate method shows all the money receipts and all the cash obligations from operating activities.

● use different computations but produce the same amount of cash flow from functions. ● present trading activities and financing activities in a similar format. Only the operating activities section is presented between your two methods in different ways. Operating cash flows start with net income, extracted from the income statement. The declaration of cash flows-indirect method-begins with net gain (or net loss) because earnings and expenses, which affect net gain, produce cash cash and receipts obligations. Revenues generate cash receipts, and expenses must be paid. But net gain as shown on the income declaration is accrual centered and the cash flows (cash basis net gain) do not necessarily equal the accrual basis earnings and expenditures.

For example, sales on accounts generate earnings that increase net income, however the company have not yet gathered cash from those sales. Accrued expenses decrease net income, but the ongoing company have not paid cash if the expenses are accrued. To go from net income to cashflow from operations, some changes must be produced by us to net gain on the statement of cash moves. These additions and subtractions follow net gain and are labeled Adjustments to reconcile net income to net cash provided by operating activities.