91Ó°ÊÓ

The schedule prepared by the business entity for providing a summary of all the transactions, including cash payments and receipts, is known as the statement of cash flow.

The main purpose of preparing the cash flow is to reflect the change in the cash balance in two periods. Another objective of the statement is to summarize the investing and financing activities of the business entity.

It is also used to determine the net cash generated or used by the business entity from investing, operating, and financing activities. It helps the users of the financial statement in making decisions.

1. The statement must contain the change in the net income. It must deduct and add the items that do not affect the cash position of the business entity.
2. The statement didn’t classify the activities as financing, investing, and operating.
3. Different items are grouped as done for current receivables and inventory.

1. The salaries and wages expenses distributed by the stock option plan must be added to the net income as it does not lead to a cash outlay.
2. The expenditure to acquire the plant assets is reported net of the amount received from the retirement of the plant assets. It must be reported separately in the investing activities section of the cash flow statement.
3. The stock split and stock dividend are not required to be disclosed in the statement because these transactions do not affect the financial position of the business entity.
4. The shares of common stock issued against the preferred stock must be reported in the significant non-cash financing activities of the statement.
5. The combined presentation of the depreciation and the depletion is acceptable because such items are shown separately when such representation provides useful information. A separate presentation does not reveal any useful information in the above case. Therefore, a combined presentation is acceptable.
6. The change in the long-term debt must be reflected separately. In the above case, the payment made for long-term borrowings is settled against the long-term borrowings’ receipts, and the net amount is reflected.