Purpose Statement of Cash Flow - Simple Example Company Directors, who are responsible for the governance of the company, and are responsible for ensuring that the company does not trade while insolvent.Potential employees or contractors, who need to know whether the company will be able to afford compensation.Potential investors, who need to judge whether the company is financially sound.Potential lenders or creditors, who want a clear picture of a company's ability to repay.Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses.People and groups interested in cash flow statements include: International Accounting Standard 7 (IAS 7) is the International Accounting Standard that deals with cash flow statements. As an analytical tool, the statement of cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. To reconcile net income to cash flow, companies subtract non-expense cash payments from net income.In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities. When net income does not take into account such cash payments, it overstates the actual cash flow prior to adjustments. These cash expenditures are not recorded as expenses, but used to increase the assets of inventory and prepaid expenses and decrease the liability of accounts payable. Companies may purchase inventory with cash, make prepayments for future expenses or pay off accounts payable when due. Certain cash transactions from operating activities are not expense related and thus, not deducted from net income. Subtract non-expense-related cash payments. To reconcile net income to cash flow, companies add to net income the amount of increase in unearned revenues. When net income does not account for such cash receipts, it understates the actual cash flow prior to adjustments. Instead, companies record customer prepayments as unearned revenue under liability. For example, companies receive cash when customers prepay for future delivery of goods or services, but do not record the payments as revenue. Certain cash transactions from operating activities are not revenue related and thus, not included in net income. Include non-revenue-related cash receipts. To avoid double counting, non-operating revenues are deducted from net income. For example, gains on sale of investments are reported as investing cash flow. However, cash flow of non-operating revenues should be reported in a non-operating section of a cash flow statement. Net income may also include non-operating revenue such as gains on sale of investments. To convert net income to cash flow, companies deduct any increase in accounts receivable from net income. If net income includes non-cash revenues, it overstates the actual cash flow prior to adjustments. Companies may report credit sales as non-cash revenues in accounts receivable. Deduct non-cash and non-operating revenues.
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