Cash flows statements (CFSs) are necessary since they provide vital information that other financial statements do not demonstrate. The position statement is a snapshot of a business’ assets and claims at a particular moment of time (Atrill & McLaney 2013). Income statement traces the way trading operations have affected the equity over time and technically illustrates profitability (Atrill & McLaney 2013a). CFS provides the data on the changes in the cash and cash equivalent flow, that is, on the flow of the wealth that is accessible on demand (for example, coins and notes or deposits) or is presented in the form of very liquid, short-term, and low-risk investments (Atrill & McLaney 2013). Thus, two latter statements are capable of explaining the first one and complement each other.
Cash and Business
CFS is concerned with liquidity that, in turn, demonstrates the importance of cash for a business. As pointed out by Atrill and McLaney (2013), a business cannot operate without the accessible cash that is needed to settle claims, pay the employees, purchase assets, and simply survive, especially during a crisis. The increase in liquidity means that more cash is available for all of these purposes (although excessive liquidity might also indicate that the cash is not used as intensively as it could be); deficient liquidity may lead to bankruptcy (Asvanunt, Broadie & Sundaresan 2011). Therefore, the statement that compares cash to the lifeblood of a business can be considered true, and I agree with it.
Controversies
CFSs are limited to demonstrating the cash flows, and they do not evaluate, explain, or predict. All this information requires additional research that is not always an option for external reviewers. On the other hand, CFSs can pose the questions that indicate the direction of future investigation (Atrill & McLaney 2013). In other words, CFS is a tool for accounting that needs to be properly employed. Naturally, people who are not working in the field of accounting may have difficulties with its usage.
Another controversy connected to CFSs consists in the varied opinions concerning the information that it should include. The standard layout includes operating, investing, and financing activities (Atrill & McLaney 2013b). The attempts at making CFS more inclusive, comprehensive and logical have resulted in the International Accounting Standard 7 (IAS) and International Financial Reporting Standards (IFRS), but these requirements are not adopted by every country yet (Harris 2016). Therefore, it can be concluded that the standards and requirements can still be modified in the future.
CFS in the US
The current standards of financial reporting in the US are governed by the Generally Accepted Accounting Principles, but it appears that the country is in the state of adopting IFRS since they are used by most modern markets since 2011 (Harris 2016, p. 1). There are differences between the two sets of regulations (for example, the “Last in, first out” measurement is prohibited by IFRS), but both require providing cash flow statements, which implies that the US considers CFS to be a crucial part of financial reporting (Harris 2016, p. 3).
Reference List
Asvanunt, A, Broadie, M, & Sundaresan, S 2011, ‘Managing Corporate Liquidity: Strategies and Pricing Implications,’ International Journal Of Theoretical And Applied Finance, vol. 14, no. 3, pp. 369-406.
Atrill, P & McLaney, E 2013, Accounting and finance for non-specialists, 8th edn, Pearson Learning Solutions, New York.
Atrill, P & McLaney, E 2013a, Accounting and finance for non-Specialists PowerPoints on the Web: Chapter 3.
Atrill, A & McLaney, E 2013b, Accounting and finance for non-specialists PowerPoints on the web: Chapter 5.
Harris, P 2016, ‘A case study of the cash flow statement: US GAAP conversion to IFRS,’ Journal of Business Case Studies, vol. 12, no. 1, pp. 1-6.