Generally, all investors, creditors and other stakeholders of an entity want to get cash out of their investment. Therefore, information about an entity’s receipts and payments is of primary importance to such users of financial statements. The statement of cash flows (otherwise cash flow statement) provides this information by reporting cash inflows and outflows classified into operating, investing and financing activities, and the net movement in cash and cash equivalents during the period.
IAS 7 Statement of Cash Flows (otherwise cash flow statement) prescribes that a statement of cash flows should be prepared in accordance with the requirements of the standard, and be presented as an integral part of an entity’s financial statements for each period for which financial statements are prepared and presented.
Purpose of a cash flow statement:
The general purpose of a statement of cash flows (sometimes as Cash flow Statement) is to exhibit accounting information about the historical changes in cash and cash equivalents of an entity during the period. Cash Flow Statement is classified in operating, investing and financing activities. This information is principally helpful to investors, creditors and other users or stakeholders of financial statements. It helps in:
• assessing evaluating an entity’s ability to generate cash and cash equivalents and evaluating the timing and certainty of their generation.
• assessing an entity’s financial structure (including liquidity and solvency) and evaluating its ability to meet its current or long term obligations and to pay dividends to shareholders.
• understanding the causes for the difference between profit or loss for a period and the net cash flow from operating activities (the causes for the differences are often useful in evaluating the quality of earnings of an entity).
• comparing the operating performance of different entities because net operating cash flows reported in the cash flow statement are unaffected by different accounting choices and judgments under accrual basis accounting used in determining the profit or loss of an entity.
• enabling the development of models to evaluate and compare the present value of the future cash flows of different entities.