Introduction:
The Statement of Cash flows presents all the cash inflows and cash outflows of an entity over a period of time. Its purpose is to provides users with information about the movements of cash flows, and the increase and decrease in cash over a period, to help ascertain an entity’s ability to generate funds and meet financial commitments. It is prepared on a cash basis, not an accrual basis. There can be a significant difference between an entity’s cash position and their profit. The management of cash flow is critical for business success. For an entity to survive, the net cash flows from operating activities should be positive. The statement of cash flows is concerned with cash receipts and payments, and not the timing of the underlying transaction. It is classified into three main sections reflecting major cash flow activities:
1. Operating activities: day-to-day activities including receipts and payments
2. Investing activities: activities which relate to the acquisition and/or disposal of non-current assets, and investments, (e.g. securities), that do not fall within the definition of cash
3. Financing activities: activities which relate to changing the size and/or composition of the financial structure of the entity (e.g. equity, and borrowings that do not fall within the definition of cash).
The direct method and the indirect method are two approaches that can be used to prepare