These are commonly prepared using cash and cash equivalents as its primary basis.

Question: These are commonly prepared using cash and cash equivalents as its primary basis.

One of the most important financial statements for any business is the cash flow statement. This statement shows how much cash and cash equivalents are generated and used by a business during a specific period of time. Cash and cash equivalents are assets that can be easily converted into cash, such as bank accounts, money market funds, treasury bills, and short-term investments.

The cash flow statement is divided into three sections: operating activities, investing activities, and financing activities. Operating activities are the main sources and uses of cash for a business, such as sales, expenses, inventory, accounts receivable, and accounts payable. Investing activities are the cash flows related to the purchase and sale of long-term assets, such as property, plant, equipment, and intangible assets. Financing activities are the cash flows related to the borrowing and repayment of debt, the issuance and repurchase of equity, and the payment of dividends.

There are two methods to prepare the cash flow statement: the direct method and the indirect method. The direct method shows the actual cash inflows and outflows from each activity, while the indirect method starts with the net income from the income statement and adjusts it for non-cash items and changes in working capital. Both methods result in the same net cash flow, but they differ in the level of detail they provide. The direct method is more informative and transparent, but it requires more data and calculations. The indirect method is simpler and more widely used, but it obscures some of the underlying cash transactions.

Regardless of the method used, these are commonly prepared using cash and cash equivalents as its primary basis. This means that only transactions that affect the cash balance are recorded in the statement. Non-cash transactions, such as depreciation, amortization, accruals, and provisions, are excluded from the statement. However, they are still important for understanding the financial performance and position of a business, so they are reported in other financial statements, such as the income statement and the balance sheet.