Jeremiah T. answered • 08/01/23
CPA Who Loves to Teach Accounting Concepts
Hello, the Cashflow Statement provides several key pieces of information that are not found elsewhere in the financial statements of an organization. In financial accounting, there are many items that affect the profit and loss on the books of an organization that do not involve cash transactions, such as depreciation expense, and there are items that do involve cash, such as paying down accounts payable balances, or purchasing new capitalized equipment. The statement of cashflows help "adjust" the financial concept of net income to show how it relates to the cash expenditures of the organization. Understanding how to prepare a cashflow statement provides many benefits, including understanding which items affecting net income involve or do not involve cash, seeing the relationship between changes in balance sheet accounts and their effect on the cash balance of a company, and understanding where cash that left the organization was actually spent. It can also provide early indicators of a company's strategy or approach to business, as cash expenditures can highlight current strategic decisions, such as a reliance on investing cash, or short and long-term plans to invest in capital equipment.
