FACULTY OF BUSINESS

ACCOUNTING SCHOOL

ACADEMIC REPORT

COURSE:
FINANCIAL AUDIT

AUTHOR:

Hidalgo Culcos, Rodrigo Alonso

TEACHER:

RIVERA TEJADA VDA DE MATIENZO, LAURA DEISI

Chimbote - Perú

(2024)

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I. INTRODUCTION

In the intricate world of financial management, the cash flow statement stands
out as a critical tool for understanding a company's financial health and
operational efficiency. Unlike other financial statements, the cash flow
statement provides a transparent and straightforward view of the actual cash
generated and utilized by a business over a specific period. This document is
indispensable for managers, investors, creditors, and other stakeholders who
need to assess the liquidity, solvency, and overall financial stability of an
organization.

A cash flow statement breaks down cash flows into three main activities:
operating, investing, and financing. Each of these categories offers unique
insights into different aspects of the company's financial operations. Operating
activities reflect the core business operations, showing how much cash is
generated from the company's primary business functions. Investing activities
provide information on the cash used for and generated from long-term
investments, indicating the company’s commitment to growth and future
development. Financing activities reveal the cash flows between the company
and its owners and creditors, illustrating how the company finances its
operations and growth.

The importance of the cash flow statement cannot be overstated. It is a crucial

tool for liquidity assessment, helping businesses ensure they have enough cash
to meet short-term obligations and avoid liquidity crises. By providing a clear
picture of cash inflows and outflows, it enables companies to manage their
finances more effectively, plan for future expenditures, and make strategic
decisions based on solid financial data.

Moreover, the cash flow statement enhances transparency and accountability in

financial reporting. It allows stakeholders to see beyond the income statement
and balance sheet, which can sometimes be influenced by non-cash items and
accounting practices. By focusing purely on cash transactions, the cash flow

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statement provides a more accurate and reliable measure of financial
performance.

Investors and creditors particularly value the cash flow statement for its role in
risk assessment. By examining cash flows, they can evaluate the company’s
ability to generate sufficient cash to cover its debts, reinvest in its business, and
provide returns to shareholders. This assessment is crucial for making informed
decisions about investing in or lending to the company.

For management, the cash flow statement is a vital tool for strategic planning
and operational management. It helps in budgeting, forecasting future cash
flows, and identifying potential cash shortfalls in advance. This proactive
approach to financial management ensures that the company can maintain
stability and pursue growth opportunities without facing unexpected financial
difficulties.

In summary, the cash flow statement is an essential financial document that

offers a comprehensive view of a company's cash inflows and outflows. Its role
in providing a clear, accurate, and detailed picture of financial health makes it
indispensable for effective financial management, strategic planning, and
decision-making. This introduction underscores the significance of the cash flow
statement in the broader context of financial analysis and highlights its utility for
various stakeholders in ensuring the long-term sustainability and success of a
business.

II. DEVELOPMENT

A cash flow statement is a financial statement that summarizes the amount of

cash and cash equivalents entering and leaving a company. It divides cash flow
into three main categories: operating activities, investing activities, and
financing activities. According to the Financial Accounting Standards Board
(FASB), the cash flow statement "provides information about the cash receipts
and cash payments of an entity during a period" (FASB, 1987).

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According to Fraser and Ormiston (2010), the cash flow statement "highlights
the firm’s cash-generating capabilities by identifying the major sources and uses
of cash" (Fraser & Ormiston, 2010).

Importance

The cash flow statement is important for several reasons:

Liquidity Assessment: It helps in determining the liquidity position of a company

by showing how well it can generate cash to meet its debt obligations and fund
its operating expenses. This is crucial for understanding the short-term viability
of a business.

Performance Measurement: It provides a clear picture of a company’s cash-

generating performance, separate from accounting profit, which can be
influenced by non-cash items. This helps stakeholders evaluate the true
performance and health of the business.

Investment and Financing Decisions: Investors and creditors use the cash flow
statement to make informed decisions regarding investing in or lending to a
company. It provides insights into how the company funds its operations and
growth, and how it returns value to shareholders.

Strategic Planning: Management uses the cash flow statement for planning and
control purposes. It helps in budgeting and forecasting future cash flows,
ensuring that the company can maintain sufficient liquidity for operations and
investments.

Classification

The cash flow statement is divided into three main sections:

Operating Activities: This section reports the cash generated from the core
business operations. It includes cash receipts from sales of goods and services,
and cash payments to suppliers and employees. It adjusts net income for non-
cash items and changes in working capital.

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Investing Activities: This section reflects the cash used for and generated from
investments in long-term assets. It includes purchases and sales of property,
plant, and equipment, and other long-term investments. Cash flows from
investing activities indicate the company's investment in its future operations.

Financing Activities: This section shows the cash flow between the company
and its owners and creditors. It includes cash received from issuing debt and
equity, as well as cash used to repay debt and pay dividends. Financing
activities provide insights into the company’s capital structure and financial
strategy.

Advantages

The cash flow statement offers several advantages:

Transparency and Accountability: It enhances the transparency of a company’s

financial operations by providing a detailed account of cash transactions. This
fosters accountability among management and builds trust with investors and
stakeholders.

Improved Financial Management: By monitoring cash flow, companies can

manage their finances more effectively. They can identify potential cash
shortages in advance and take corrective actions to avoid liquidity crises.

Decision-Making Tool: The cash flow statement is an essential tool for decision-
making. Investors, creditors, and management use it to assess the company's
financial stability and make informed decisions about investments, lending, and
strategic planning.

Compliance and Reporting: It ensures compliance with financial reporting

standards and provides a basis for external reporting to regulatory bodies,
investors, and other stakeholders. Accurate cash flow reporting is essential for
maintaining the integrity of financial information.

Insight into Financial Health: Unlike the income statement, which can be
affected by various accounting policies and non-cash items, the cash flow

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statement provides a clear view of the actual cash generated and used by the
company, offering a more straightforward insight into its financial health.

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Conclusion

The cash flow statement is an indispensable financial tool that provides a

detailed account of a company’s cash inflows and outflows from operating,
investing, and financing activities. Its importance lies in its ability to offer a clear
and accurate picture of a company’s liquidity, performance, and financial health.
By enhancing transparency and aiding in better financial management, the cash
flow statement serves as a critical resource for investors, creditors, and
management in making informed decisions and ensuring the sustainability of
the business.

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BIBLIOGRAPHIC REFERENCES

 FASB (1987). Statement of Financial Accounting Standards No. 95:

Statement of Cash Flows. Financial Accounting Standards Board.
 Fraser, L. M., & Ormiston, A. (2010). Understanding Financial
Statements (9th ed.). Pearson.