simplyfaiq
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Hello,
I Have a basic question regarding the purposes of building a cashflow statement which remains yet unanswered after asking many people that i know of. Therefore I thought I'd try my luck here.

The basic question I have is interrelated to the main purpose of building a cashflow. To the best of my knowledge, we build it to find the inflows and outflows of cash of a business during a certain period. What I don't understand is that is the Bank or Cash account alone not sufficient to do that? why go all the trouble of building a cashflow statement when you can just refer to your T accounts for the cash inflows and outflows?

Any help will be much appreciated.
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Tbx
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(Original post by simplyfaiq)
Hello,
I Have a basic question regarding the purposes of building a cashflow statement which remains yet unanswered after asking many people that i know of. Therefore I thought I'd try my luck here.

The basic question I have is interrelated to the main purpose of building a cashflow. To the best of my knowledge, we build it to find the inflows and outflows of cash of a business during a certain period. What I don't understand is that is the Bank or Cash account alone not sufficient to do that? why go all the trouble of building a cashflow statement when you can just refer to your T accounts for the cash inflows and outflows?

Any help will be much appreciated.
For non accountants to understand perhaps?
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simplyfaiq
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(Original post by Tbx)
For non accountants to understand perhaps?
Sorry, could you please explain what you mean by that?
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Tbx
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(Original post by simplyfaiq)
Sorry, could you please explain what you mean by that?
Financial statements are generally prepared for shareholders, who may or may not have such detailed knowledge of accounting. This is why they are prepared statements rather than just giving them t accounts, which take a while to understand.
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simplyfaiq
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(Original post by Tbx)
Financial statements are generally prepared for shareholders, who may or may not have such detailed knowledge of accounting. This is why they are prepared statements rather than just giving them t accounts, which take a while to understand.
Ah I see what you mean. Interesting theory, however I'm all ears to the point of views of other TSR members as well.
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snakesnake
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(Original post by simplyfaiq)
Hello,
I Have a basic question regarding the purposes of building a cashflow statement which remains yet unanswered after asking many people that i know of. Therefore I thought I'd try my luck here.

The basic question I have is interrelated to the main purpose of building a cashflow. To the best of my knowledge, we build it to find the inflows and outflows of cash of a business during a certain period. What I don't understand is that is the Bank or Cash account alone not sufficient to do that? why go all the trouble of building a cashflow statement when you can just refer to your T accounts for the cash inflows and outflows?

Any help will be much appreciated.
If you only look at the bank account then all you see is a net movement in cash. That in and of itself is useless as it doesn't show what processes-activities in the business are providing or using up cash. Hence you create a cashflow statement to give a better overview of the business.
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simplyfaiq
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(Original post by snakesnake)
If you only look at the bank account then all you see is a net movement in cash. That in and of itself is useless as it doesn't show what processes-activities in the business are providing or using up cash. Hence you create a cashflow statement to give a better overview of the business.
Well, I still have a slight bit of confusion. If you look at the company's internal Bank account which is kept for recording of data, we can see all the net movement in cash (as you said) with their respective destinations.

This means that if I paid some money for any process or activity such as... lets say paid expense of $50 or sold asset for $100 the entry would be

Expense $50 (Dr)
Bank $50(Cr)

Bank $100 (Dr)
Asset $100 (Cr)

Now these entries are already telling us that we used that much amount of money ($50 or $100) for the uses of Expense and Asset Purchase. Looking at the bank account or cash account for the year would exactly tell us how much cash came in the business and went out of the business from such activities.

So why go the trouble of bringing in Operating profit, Depreciation, Inventory Increase/Decrease and get into all that hassle?

Sorry for the very long reply. I just though I could explain it better this way.
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Chapeau Rouge
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(Original post by simplyfaiq)
Well, I still have a slight bit of confusion. If you look at the company's internal Bank account which is kept for recording of data, we can see all the net movement in cash (as you said) with their respective destinations.

This means that if I paid some money for any process or activity such as... lets say paid expense of $50 or sold asset for $100 the entry would be

Expense $50 (Dr)
Bank $50(Cr)

Bank $100 (Dr)
Asset $100 (Cr)

Now these entries are already telling us that we used that much amount of money ($50 or $100) for the uses of Expense and Asset Purchase. Looking at the bank account or cash account for the year would exactly tell us how much cash came in the business and went out of the business from such activities.

So why go the trouble of bringing in Operating profit, Depreciation, Inventory Increase/Decrease and get into all that hassle?

Sorry for the very long reply. I just though I could explain it better this way.
The cash flow statement is designed to be a summary statement for shareholders and others interested to see how a company is using its cash. Cash is the most important element of any business, you can be making a profit but if you don't have enough cash to pay your suppliers then you will be out of business very quickly. Therefore it serves as an important analysis tool to see what processes in a business are using up its cash ie. Is the company purchasing a lot of ppe, is its cash being tied up in inventory which have to be sold before they can be realised as cash? A bank statement alone would not provide this information for non cash flow processes such as depreciation and would also be hundreds of pages long and showing fairly useless information from to someone using the financial statements without some sort of summary.

in terms of operating profit etc.think what is actually creating that number. In the simplest form it is your sales less any costs you have made to reach your profit for the year. However this is not a reflection on how much cash you have. For that you need to look at the movements year on year in items on your balance sheet that impact on your cash position. As mentioned previously, an increase in inventory would be a negative cash flow as you have purchased that inventory but not yet converted it into a sale that would feed in your profit figure. Therefore your cash position would be reduced.

Similarly, if your payables have increased, that would be a cash inflow as this cash you have kept in the business by not paying suppliers. Depreciation is added back as it would have been treated as a cost to reach your original profit firm (depreciation expense) but it is not actually a cash outflow, therefore it is treated as a cash inflow on the statement.
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simplyfaiq
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(Original post by Chapeau Rouge)
The cash flow statement is designed to be a summary statement for shareholders and others interested to see how a company is using its cash. Cash is the most important element of any business, you can be making a profit but if you don't have enough cash to pay your suppliers then you will be out of business very quickly. Therefore it serves as an important analysis tool to see what processes in a business are using up its cash ie. Is the company purchasing a lot of ppe, is its cash being tied up in inventory which have to be sold before they can be realised as cash? A bank statement alone would not provide this information for non cash flow processes such as depreciation and would also be hundreds of pages long and showing fairly useless information from to someone using the financial statements without some sort of summary.

in terms of operating profit etc.think what is actually creating that number. In the simplest form it is your sales less any costs you have made to reach your profit for the year. However this is not a reflection on how much cash you have. For that you need to look at the movements year on year in items on your balance sheet that impact on your cash position. As mentioned previously, an increase in inventory would be a negative cash flow as you have purchased that inventory but not yet converted it into a sale that would feed in your profit figure. Therefore your cash position would be reduced.

Similarly, if your payables have increased, that would be a cash inflow as this cash you have kept in the business by not paying suppliers. Depreciation is added back as it would have been treated as a cost to reach your original profit firm (depreciation expense) but it is not actually a cash outflow, therefore it is treated as a cash inflow on the statement.
A well written and informative answer. Help much appreciated. By the way, pardon my ignorance but what is "ppe"?
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Chapeau Rouge
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(Original post by simplyfaiq)
A well written and informative answer. Help much appreciated. By the way, pardon my ignorance but what is "ppe"?
Woops abbreviations! Property, plant and equipment, basically machines, furniture etc.
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simplyfaiq
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(Original post by Chapeau Rouge)
Woops abbreviations! Property, plant and equipment, basically machines, furniture etc.
Thanks I get it
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