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The purpose of
the statement of cash flows is to highlight the major activities that directly
and indirectly impact cash flows and hence affect the overall cash balance.
Managers focus on cash for a very good reason―without sufficient cash balance at
the right time, a company may miss golden opportunities or may even fall into
bankruptcy.
The cash flow statement answers questions that cannot be
answered by the income statement and a balance sheet. For example a statement of
cash flows can be used to answer questions like where did the company get the cash to pay
dividend of nearly $140 million in a year in which, according to income
statement, it lost more than $1 billion? To answer such questions, familiarity
with the statement of cash flows is required.
The cash flow statement is a valuable
analytical tool for managers as well as for investors and creditors, although
managers tend to be more concerned with forecasted statements of cash flows that
are prepared as a part of the budgeting process.
cash flow statement can
be used to answer crucial questions such as the following:
- Is the company generating sufficient positive
cash flows from its ongoing operations to remain viable?
- Will the company be able to repay its debts?
- Will the company be able to pay its usual
dividends?
- Why is there a difference between net income
and net cash flow for the year?
- To what extent will the company have to
borrow money in order to make needed investments?
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