Question

Which of the following statements is correct with respect to analyzing accounts for the preparation of a statement of cash flows?

1) The statement of cash flows shows the changes in a company's cash and cash equivalents over a period of time.
2) Analyzing accounts is not necessary for the preparation of a statement of cash flows.
3) The statement of cash flows only includes information about cash received from customers.
4) The statement of cash flows is prepared using the accrual basis of accounting.

Answer 1

The correct option is A). The correct statement about preparing a statement of cash flows is that it shows the changes in a company's cash and cash equivalents over time. Analyzing accounts is crucial for its preparation, considering cash inflows and outflows from all financial activities.

Step-by-step explanation:

The statement about analyzing accounts for the preparation of a statement of cash flows that is correct is: The statement of cash flows shows the changes in a company's cash and cash equivalents over a period of time. Analyzing accounts is essential when preparing a statement of cash flows because it helps to categorize the cash inflows and outflows during the reporting period, thus providing valuable information about a company's liquidity and financial flexibility.

Contrary to the incorrect options provided, the statement of cash flows encompasses not just cash received from customers, but also involves other financial activities such as investing and financing operations. Additionally, the statement of cash flows is prepared using the cash basis of accounting rather than the accrual basis, ensuring a focus on actual cash transactions.