Business, 11.03.2020 02:47 lbelle

Financial statements all have a goal. The cash flow statement does as well.

Requirements

R1. Describe how the Statement of Cash Flows helps investors and creditors perform each of the following functions:

a. Predict future cash flows

b. Evaluate management decisions

c. Predict the ability to make debt payments to lenders and pay dividends to stockholders

Answers: 1

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Answers

A cash flow statement is one of the most important statements along with the income statement and balance sheet in the financial statements.

A statement of cash flow lets the organization know how much precisely on cash that came in and went out of the organization in any given period.

a) To predict future cash flow: this is a function of the cash flow statement as it enables the organization predict from past figures through a cash projection statement which modifies and accounts for anticipated changes in price, volume, interest rates, and other factors and enables the firm know how much cash is likely to flow in and out of the entity in any given future period. This enables the firm know where it stands in terms of liquidity and also helps in budgeting and making long-term plans for the organization.

b) To evaluate management decision: The cash flow statement is a great indication of a firms liquidity which is a vital indicator a the firms ability to remain in business. The cash flow statement enables investors know the exact amount of cash the has come in and out of the organization and not the profit and loss (which can be influenced through profit smoothing). The cash flow statement portrays how well cash has been spent by the company and what the cash was spent on.

c) Predict the ability to make debt payments to lenders and pay dividends to stockholders: the cash flow statement helps the firm acknowledge how much in cash i.e. how liquid the firm is which is basically its ability to make debt payments as well as any other cash payment required such as payment of dividend. The cash flow statement also lets the firm know is it would require borrowing to make any such payment.

Explanation:

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Financial statements all have a goal. The cash flow statement does as well.

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