The statement of cash flows explains where a business’s cash comes from and how it is used during a period, typically a year. Net profit is important, but it does not by itself show whether a firm is generating enough cash to meet obligations, invest in its operations, or repay debt.
The statement of cash flows summarizes the cash flowing into and out of a firm during a specific period. It tracks cash receipts and cash payments, helping managers, creditors, investors, and financial analysts understand the firm’s cash position and financial viability.
All flashcards
What is the purpose of the statement of cash flows?
It summarizes a firm’s cash receipts and payments over a period, showing the sources and uses of cash and helping users assess cash-flow problems and financial viability.
What are the three cash-flow categories?
Operating activities relate to producing goods or services; investment activities relate to buying and selling fixed assets; financing activities relate to debt and equity financing.
Why is cash flow useful in addition to net profit?
Profit does not necessarily mean cash has been collected. A business may need cash to pay expenses and debts even when some reported sales remain unpaid.
How did Delicious Desserts’ cash and marketable securities change?
They increased by $20,215: $29,215 provided by operations less $5,000 used for investment and $4,000 used for financing.
Quiz questions
What does a statement of cash flows summarize?Answer: The cash flowing into and out of a firm during a specific period.
Which category includes cash flows related to producing and delivering a firm’s goods or services?Answer: Operating activities.
Why can a company that reports a profit still experience cash-flow difficulties?Answer: Some reported sales may not yet have been collected in cash, while the company still needs cash to pay obligations.
Delicious Desserts spent $5,000 to increase gross fixed assets. How is this cash flow classified?Answer: Cash used in investment activities.
Given $29,215 provided by operations, $5,000 used in investment, and $4,000 used in financing, what is the net increase in cash and marketable securities?Answer: $20,215.
Based on Introduction to Business 2e by Lawrence J. Gitman, Carl McDaniel, Amit Shah, Monique Reece, Linda Koffel, Bethann Talsma, James C. Hyatt (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.