BUS103: Introduction to Financial Accounting

In November 1987, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows". The Statement became effective for annual financial statements for fiscal years ending after 1988 July 15. Thus, the statement of cash flows is now one of the major financial statements issued by a company. The statement of cash flows replaced the statement of changes in financial position, on which funds were generally defined as working capital. Working capital is equal to current assets minus current liabilities.

The main purpose of the statement of cash flows is to report on the cash receipts and cash disbursements of an entity during an accounting period. Broadly defined, cash includes both cash and cash equivalents, such as short-term investments in Treasury bills, commercial paper, and money market funds. Another purpose of this statement is to report on the entity's investing and financing activities for the period. As shown in Exhibit 50, the statement of cash flows reports the effects on cash during a period of a company's operating, investing, and financing activities. Firms show the effects of significant investing and financing activities that do not affect cash in a schedule separate from the statement of cash flows.