Question

The IFRS has implemented IAS 1 - Presentation of financial statements, and IAS 7 - Statement of cash flows to outline the requirements for the presentation of general purpose financial statements. The standards also provide guidelines for the structure and minimum requirements for their content. These financial statements are intended to serve users who are not in a position to require financial statements tailored to their particular information needs.

Required:

Discuss the importance of the above statement as a part of the financial reporting to external users of financial statements relative to:

(i) Statement of cash flows

(ii) Statement of financial position (Balance Sheet).

Answer 1

Importance of statement of cash flow to external users

• it helps to ascertain cash flow from operations/operating activities as well as investing and financing activities
• It Helps to ascertain liquidity and profitability position
• It shows movement of cash in between balance sheet dates
• It establishes net profit and changes in cash position of the firms
• it shows sources and application of fund during the particular period of the time.
• It is the indicator of cash earning capacity of the firm.
• It records Changes in fixed asset as well as current assets.

Importance of statement of financial position to external users:

1. Net worth is the true value of the business, hence It provides a snapshot of business worth
2. It can be used to determine whether the company has enough working capital to sustain its operations.
3. Help to see if company can sustain its future operations , by looking at the value of non current asset such property, plant and machinery, etc..
4. Helps to identify possible issuance of dividend (can assess returns from investments in company.
5. Helps to determine outstanding liability of the company.
6. It helps to determine various financial ratios