LESSON 12 - 1 LESSON 12 Lesson 12 covers the Statement of...

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LESSON 12 Lesson 12 covers the Statement of Cash Flows and the basics of financial statement analysis. In the first section of this final Lesson, you will learn more about the fourth of the four financial statements to which you were introduced in Lesson 1, which was the Statement of Cash Flows. In the second section of this Lesson, you will be taught the basics of financial statement analysis using the information contained in the financial statements. STATEMENT OF CASH FLOWS The primary purpose of the Statement of Cash Flows is to provide information about cash receipts, cash payments, and the net change in cash resulting from operating, investing, and financing activities of a company during the same accounting period that is reported on in the first three of the four financial statements that you have been taught in the previous Lessons of this course, namely the Income Statement, Statement of Retained Earnings and Balance Sheet. There is a fundamental difference between these first three financial statements and the Statement of Cash Flows, which is: the Income Statement, Statement of Retained Earnings and Balance Sheet are based upon Accrual accounting concepts that you learned in the previous Lessons of this course, whereas the Statement of Cash Flows is based upon the Cash Basis of accounting. The two fundamental Accrual Accounting principles which are the Revenue Recognition Principle and the Matching Principle are “undone” in preparing the Statement of Cash Flows from the first three financial statements. The Statement of Cash Flows was not originally required by the SEC to be included in the 10K Report (see Lesson 1 on the 10K report) filed by reporting corporations as one of the audited financial statements submitted to the SEC. However, this situation changed in 1988 , when the Statement of Financial Accounting Standard (SFAS) 95, Statement of Cash Flows began requiring corporations to include the Statement of Cash Flows in their audited annual financial reports that the corporations report to the SEC. You can learn more about the Statement of Financial Accounting Standard (SFAS) 95, Statement of Cash Flows at the following link: http://www.nysscpa.org/cpajournal/old/08209170.htm Why report the causes of changes in Cash? Because investors, creditors, and other interested parties want to know what is happening to a company’s most liquid asset, Cash. The Statement of Cash Flow provides information on the entity’s ability to generate future cash flows and the entity’s ability to pay dividends and meet obligations. The Statement also shed light on the reason for the difference between net income and net cash provided (used) by operating activities, as well as the cash investing (for example, purchase PP&E assets) and financing transactions (for example, issue bonds and common stock) during the period.
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