ACC 281 Week 5 DQ1 - 7431

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Why are companies required to prepare a statement of cash flows? Why is the statement of cash flows divided into three sections? What does each section tell you about the operations of a company?  Which is the most important section?

 

Why are companies required to prepare a statement of cash flows?

The FASB is now requiring a statement of cash flow be provided under SFAS 95 the main reason for this requirement is to validate the integrity of the net income. This allows users to understand the difference between net income relating to cash receipts. We also can validate the payments that the company may have made looking into the quality of the income being stated.

Why is the statement of cash flows divided into three sections? What does each section tell you about the operations of a company?

The cash flow statement is broken out in the following categories financing, operations, and investment. The operations and financing section tell the user how the company is making its money. This will show exactly how much a company is selling it goods for but also how much it is costing them to produce them. Investment shows how the company is spending it money. You would want to see an organization re-investing in the capital item needed to keep the organization going while looking at investment that the organization may have acquired. The statement is broken out into three sections so that users can follow organizations activities and understand what each section should contain.

Which is the most important section?

I would look at the organizations operations and financing section to make sure that they are making a profit on what they are producing this should allow the organization to sufficiently supply money for investment purposes and organization that rely solely on investment income may end up filing bankruptcy.

 

Solution Description

Why are companies required to prepare a statement of cash flows? Why is the statement of cash flows divided into three sections? What does each section tell you about the operations of a company?  Which is the most important section?

 

Why are companies required to prepare a st