The importance of cash flow statement
Although the business is a
great investment vehicle, there are still many of them failed every year.
According to the statistics over small and medium-sized entities, their
survivals were threatened by the classic killer of business, the insufficient
cash flows. The typical victim of the cash flow issues is the One. Tel Ltd,
which suffered an immense amount of deficit of cash while maintaining a high
volume of profit and stock price. The collapse of it emphasized the importance
of liquidity once again. As an accountant, we must be able to provide reliable
cash flow statement in order to successfully communicate accurate information
towards external/internal users. And consequently, they will be able to make
relevant decisions base on that.
Investors, managers and
other interested parties, require the statement of cash flows due to the
following reasons. Firstly, it indicates the business’ ability to generate
future cash flows. The users of the report will be able to identify the major
source of cash inflows and outflows. Since cash is needed to settle the daily
transactions, plus supply fund for investment, it is a critical issue for the
entity to maintain an adequate level of cash reserve. In addition, the
statement defines the entity’s ability to pay out cash dividends, debts and
other obligations. If a business’s cash flow statements presents the problem of
low level of cash, the related parties epically the investors will question
about the possibility of the risk that business would not be able to pay its
bills. Moreover, the users of the statement may determine the difference
between the profit and operating cash flow. In our previous example, One. Tel.
Ltd. incurred the problem of this tremendous gap in these two figures. In fact,
a healthy and sustainable stream of cash flow correlated with the profit to
determine the business’ status. A company may raise a lot of cash by selling
non-current asset, which is not likely to continue in the next period. In
contrast, company that makes a huge profit over credit sales also faces the
potential threat of fund chain fracture. Furthermore, the users of the
statement will obtain a better understand of the changes in liability and
equity account through the study of investment and financial cash flow
activities.
In conclusion, the cash flow
statement provides a systematical report of the business’ cash reserves
condition. Hence it is crucial for us to comprehend this useful tool in
financial accounting.
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