Case 7-5 The Statement of Cash Flows
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Case 7-5 The Statement of Cash Flows
The Statement of Cash Flow is a vital part of financial reporting, it shows investors,
creditors, and shareholders the company has the ability to pay its current and future debts. Prior
to 1971 only the income statement and balance sheet were required by GAAP. Companies started
to include their own “funds statement”, due to investors and creditors voicing their desire for
such statements. By 1987, the Statement of Cash Flows was codified. We will focus on the goals
of the statement to investors and how liquidity, solvency, and financial flexibility relates to the
statement.
Presenting the Statement of Cashflows to Investors
For investors, the Statement of Cashflows is greatly important. The reason it is important
to investors is that it helps them predict the amount of cash that will be distributed in the future
through dividends and interest, and to evaluate the risk of certain investments. The statement of
cash flows primary purpose, consistent with, SFAC Nos. 1 and 5 and later confirmed in SFAC
No. 8., is to provide relevant information about the cash receipts and cash payments of a
company during a specific period. (Schroeder et al., 2019, p257)
SFAC No. 1 states that cash flows should provide information to help investors, creditors,
and others assess the amounts, timing, and uncertainty of prospective net cash inflows
(FASB,2008). SFAC No. 5 indicated that a full set of financial statements should show cash
flows for the period, and it shows the usefulness of cash flow reporting.
SFAC No. 8 supersedes SFAC No. 1, No. 8 goes into greater detail about the goals of
presenting cash flow information to investors. It states cash flows help users; interpret other
information about financial performance; assess the entity’s ability to generate future net cash
Case 7-5 The Statement of Cash Flows
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inflows; evaluate its financing and investing activities; understand a reporting entity’s operations;
assess its liquidity or solvency; information that is useful in assessing the amounts, timing, and
uncertainty of the (prospects for) future net cash flows to the entity (FASB, 2021). No. 8 also
states, the statement of cash flows should replace the statement of changes in financial position
as a required financial statement.
Cash Flow’s Liquidity, Solvency, and Financial Flexibility
Liquidity information is important for users of financial statements in evaluating the
timing of future cash flows. Liquidity is the ability to convert an asset, for example, accounts
receivable and investments, to cash or pay for a current liability. To be considered Liquid, the
asset must be “nearness to cash” of an entity’s resources; it is also necessary for evaluating
solvency and financial flexibility.
To be solvent the company must have the cash or be able to quickly obtain the cash for
business operations and pay its debts when due. If a company becomes insolvent it will result in
liquidation and losses to the investors, therefore the cash flow statement is so important. If the
company has a threat of insolvency the cost to take out future debt goes up, also the amount of
risk increased as well.
Financial flexibility is the ability of the company to generate cash from its operations,
economic resources, or contributed capital without the threat to distribute operations. For a
company to have financial flexibility it can adapt to ever-changing markets and take advantage
of new opportunities. Knowing this would not be possible without having an accurate Statement
of Cash Flows.
Christian Worldview
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The Statement of Cash Flow shows the ability to continue operations and ability to pay
your debt. There are many verses about continuing operations and about paying your debt
throughout the bible. Dave Ramsey preaches Proverbs 22:7 “The rich rules over the poor, and the
borrower is the slave to the lender”. If you do not have the cash flow to help pay your debts this
can threaten the business’s solvency. Proverbs 13:22 states “A good man leaves an inheritance to
his children's children” this highlights financial flexibility to be able to continue and adapt
operations for generations. The verse that best highlight the need to know your cash flow for
continuing operations is Luke 14:28-29 “For which of you, intending to build a tower, sitteth not
down first, and counteth the cost, whether he have sufficient to finish it? Lest haply, after he hath
laid the foundation, and is not able to finish it, all that behold it begin to mock him”
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References
ESV. (2016). Proverbs 22:7, Proverbs 13:22, Luke 14:28-29 (ESV). Bible Gateway. Retrieved
November 13, 2022, from https://www.biblegateway.com/
FASB. (2008). Statement of Financial Accounting Concepts No. 1. Retrieved November 13,
2022, from https://fasb.org/Page/ShowPdf?path=aop_CON1.pdf&title=CON+1+
%28AS+AMENDED%29&acceptedDisclaimer=true&Submit=
FASB. (2021, December). Statement of Financial Accounting Concepts No. 8 As Amended.
Retrieved November 13, 2022, from https://fasb.org/document/blob?fileName=Concepts
%20Statement%208%E2%80%94Chapter%201%20(As%20Amended).pdf
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and
Analysis: Text and Cases (13th ed.). Retrieved November 8, 2022, from Wiley Global
Education US. https://mbsdirect.vitalsource.com/books/9781119577713
