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Financial Reporting, Financial Statement Analysis and Valuation 9th Edition

Financial Reporting, Financial Statement Analysis and Valuation (9th Edition)

Book Edition9th Edition
Author(s)Wahlen
ISBN9781337614689
PublisherCengage
SubjectFinance
Chapter 3, End of Chapter, Questions and Exercises, Exercise 3.1
Page 162

Need for a Statement of Cash Flows. 

 

"The accrual basis of accounting creates the need for a statement of cash flows." Explain.

Explanation

Cash transactions are those in which cash is also exchanged along with the exchange of goods and services. Non-cash transactions are the transactions in which there is no involvement of cash such as depreciation. 

 

Preparing the financial statements on accrual basis results in a difference between the net cash income in the financial statements and the actual cash income. 

 

Cash flow statement considers the timings of the cash flows and hence depicts the actual cash income for a financial period. It is also needed to show the effect of various activities such as operating activities, investing activities and financing activities on the actual cash income of the firm. 

Verified Answer

The accrual basis of accounting creates the need for cash flow statements because according to the accrual basis, cash transactions as well as non-cash transactions are included while preparing the income statement. 

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