Question

What is Cash Flow Statement? Describe its uses.

Hint:

Profit \(\neq\) Cash. Use the Cash Flow Statement to see \emph{where} cash actually came from and \emph{where} it went.

Answer 1

Step 1: Define clearly.
A Cash Flow Statement (CFS) explains the change between opening and closing cash/bank balances by grouping movements into: - \emph{Operating activities} (core business), - \emph{Investing activities} (long-term assets/investments), and - \emph{Financing activities} (owners’ funds/borrowings).
Step 2: State the key uses.
1) \emph{Liquidity & solvency assessment} — shows whether the firm can pay obligations and dividends in cash.
2) \emph{Quality of earnings} — separates accrual profit from actual cash generation.
3) \emph{Planning & control} — supports budgeting for capex, debt repayments and working-capital needs.
4) \emph{Decision-making} — timing of borrowing/repayment, dividend policy, and investment disposal/acquisition.
5) \emph{Reconciliation} — bridges Net Profit and Net Cash from Operating Activities (Direct/Indirect method).
6) \emph{Comparability} — standard classification enables inter-period and inter-firm comparison.
Step 3: Conclusion.
Thus, CFS is a period statement focused on \emph{cash}, not accruals, and is indispensable for liquidity management and financing decisions.
Final Answer: \[ \boxed{\text{Cash Flow Statement = classified summary of cash movements; main uses: liquidity, planning, decisions, and reconciliation.}} \] % Quciktip