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To be more precise, the
Cash Flow Statement is the final statement in the Financial Report; it is a
direct flow and congregation of information from the Income Statement, Owner’s
Equity Statement and Balance Sheet. It is useful in assessing the prospects of
future net cash inflows, its amount, timing, and uncertainty, therefore adding validity
and accountability for users to assess the financial health of a business. According
to (IASC), information about a reporting entity’s cash flows during a period
also helps users to assess the entity’s ability to generate future net cash
inflows. (Hung, Chan and Yhi 1995) believes that the statement of a company’s
cash flow complements and presents information different from that provided in
the financial statements, therefore being useful for assessing future net cash
inflows. For example, the Statement of Standard Accounting Practice (SSAP), mandates
that cash flows within a company’s statement of cash flows is separated into
three standard categories of activity: operating activities, the principal
revenue-producing activities of the entity; investing activities, the
acquisition and disposal of long-term assets and other investments not included
in cash equivalents; and financing activities that result in changes in the
size and balance of the contributed equity and borrowings of the entity. (Hung)
believes that categorising these activities ensures cash flows are reported in
a form that facilities comparison of the cash flow performance of different
businesses as well as highlighting the significant components of cash flow.
This ensures that the information gathered is relevant to a particular business
of that category, further helping financial users to predict or anticipate
future outcomes or confirm earlier predictions or evaluations of an entity’s resources,
claims and changes in its resources and claims for future cash inflows.
Furthermore, (Foster III, McNelis and Smith 2012) argues that operating
activities is the most important section for determining the financial strength
and enterprise of a business. Operating cash inflows include interests and
dividend collections on debt and equity securities of other entities,
collections from customers for the sale of goods and services and all other
receipts not defined as investing or financing inflows (Nurnberg 1993). The
information gathered from operating cash flows is then able to faithfully
report an immediate idea of the health of a business, possibly informing users
the entity’s ability to adapt to economic changes through its changes in resources
and claims, as well as its timing and amount of cash inflows. For example, the
amount of cash flows is able to give a representation or an idea of whether the
reporting entity is able to generate sufficient positive outflow to maintain
and grow its operations or whether they will require external financing for
capital expansion.

Additionally, (Gombola
and Ketz 1983) and (Gombola et al. 1983) emphasises the usefulness of operating
cash flows for investors. Information from the recourses of the entity, claims
against the entity and changes in recourses and claims are variables that are
useful in descriptive and predictive studies involving ratios, such as
financial ratios, liquidity ratios, probability and activity ratios. Liquidity ratios
analyse a company’s timing and ability to pay off their short-term debts;
probability ratios determine the number of cash inflows and how well a company
can generate profits from its operations, and activity ratios are used to
evaluate how well a company uses its assets and liabilities to generate sales
and maximise profits. Additionally, (Early and McClur 2016) state how investing
activities largely reflects the amount of cash the company has spent on capital
expenditures, such as property, plant, and equipment, as well as acquisitions
on other businesses and monetary investments, such as money market funds. With
this information, the cash flow statement is able to present the change in cash
gains/losses from investments, operating subsidiaries and changes resulting
from cash expenditure in investments of capital assets (Mike Periu 2016).
Changes in expenditure for property, plant, and equipment are sourced from the
investing section of the cash flow statement, analysists of the cash flow
statement are then able to use investing activities to determine how well a
company is able to generate cash or how much cash is spent on investing
activities, as well as monitor a company’s welfare in growth and capital. For
example, a company that consumes large amounts of cash for investment purposes
indicates that it is investing for future growth. Capital expenditures are also
a popular measure of capital investment used in the valuation of stocks,
although an increase in capital expenditures points to a reduction in cash flow.
This benefits users in its decision making, investors are able to determine the
ultimate health and potential of a business and lenders are able to estimate
the entity’s ability to pay back all loaned funds and related interest charges. 

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