tailieunhanh - Ebook Financial accounting (5th edition): Part 2

(BQ) Part 2 book "Financial accounting" hass contents: Statement of cash flows, regulatory framework, corporate social responsibility and corporate governance, valuation and performation measurement, control of accounting systems, information technology and accounting, the finale,.and other contents. | 26/8/09 14:40 Page 195 10 Statement of cash flows Objectives By the end of this chapter you should be able to: ᭤ Explain the importance of cash flow within the business. ᭤ Identify cash flows within a business. ᭤ Prepare a statement of cash flows. ᭤ Explain the relationship between the statement of cash flows, statement of comprehensive income and statement of financial position within a business. ᭤ Identify the difference between the indirect and direct methods of preparing a statement of cash flows. ᭤ Identify and calculate a simple cash flow ratio. ᭤ Explain the word ‘fund’ as used in accounting. Introduction In previous chapters we have concentrated on preparing financial information for a business based on the concept of profit. You should have already realised that profit does not equal cash and therefore it is quite possible for a business to be making reasonable profits but have very little cash. However, cash is vital to a business. Without it the business cannot purchase inventory, pay trade payables, wages or any other expenses. Cash is quite often referred to as the ‘lifeblood’ of a business – without it it will not survive! A business therefore must pay attention to both its profit and cash position. Cash flows within a business At this point in your studies you should be able to complete the following activity quite quickly. If you do have problems return to Chapter 5 and consider the cash transactions that Mr Bean made. 26/8/09 14:40 Page 196 196 Financial Accounting Activity Identify as many cash flows as you can for a business. Enter them in the table below. Two are already entered for you. CASH FLOWS Into the business ᭤ Capital contributed in the form of cash Answer Out of the business ᭤ Wages paid in cash CASH FLOWS Into the business ᭤ ᭤ ᭤ ᭤ ᭤ ᭤ ᭤ Capital .