The Need for Cash Flow Statements
The statement of cash flows summarizes information concerning the cash inflows (receipts) and outflows (payments) for a specific period of time. Statement of cash flow reflects earnings before depreciation, amortization, and non-cash charges. For investors, the cash flow reflects a company’s financial health. The more cash that is available for operations the better the ability of the company to function and therefore is more healthy.
The cash flow statement was needed because without this statement companies could appear profitable and show profits despite the fact that they had cash shortages. This could happen to funds being tied up in receivables and in operations. Without the statement of cash flows, outside investors could not really judge the health of the company in a fair manner.
Kimmel, P. D., Kieso, D. E., & Weygandt, J. J. (2011). Financial accounting: Tools for business decision making. Hoboken, NJ: John Wiley & Sons.
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