Question

You can determine a company’s cash situation by analyzing the cash flow statement. The cash flow statement also helps determine whether the company (1) is generating enough cash from its operations to make new investments and pay dividends or (2) will need to generate cash by issuing new debt or selling its assets.

Which of the following is true for the statement of cash flows?

a. It reflects cash generated and used during the reporting period.
b. It reflects revenues when earned.

Answer 1

Answer: a. It reflects cash generated and used during the reporting period

Step-by-step explanation:

The Cash flow statement is very important and is useful to various stakeholders in a company with the most important being the Company Management itself and Creditors.

Management are able to use the Cash flow statement to see how much actual cash was spent in the year as well as how much was used. This is important because the Income statement contains entries that might show revenue that have not being received or expenses such as depreciation that did not impact the actual cash the company has. The Cash flow statement fixes this by showing those actual figures thus enabling the company to plan better.

It is also useful to Creditors so that they see if a company is able to pay them for the period.