Q14-1SE - Horngren'S Financial And Managerial Accounting

Question

Question: Describing the purposes of the statement of cash flows Financial statements all have a goal. 

The statement of cash flows does as well. Describe how the statement of cash flows helps investors and creditors perform each of the following functions: 

a. Predict future cash flows. 

b. Evaluate management decisions. 

c. Predict the ability to make debt payments to lenders and pay dividends to stockholders.

Step-by-Step Solution

Answer

Answer

 

The statement of cash flows reports cash inflow and cash outflow from the business during a specified period.

Step 1: How investors and creditors can predict future cash flows

With the help of statement of cash flows, free cash flow can be easily calculated that can help investors and creditors to predict future cash flows.

Step 2: How investors and creditors can evaluate management decisions

Mainly the investing and financing decisions are taken by the management of the company so, if the cash flow of investing and financing activity is positive it means management take decisions wisely.

Step 3: How investors and creditors can predict the ability to make debt payments to lenders and pay dividends to stockholders.

The consistency in making debt payment and dividends to stockholders by the company help investors and creditors to predict the ability to make debt payments to lenders and pay dividends to stockholders.