A. Read the text and supply the prepositions where necessary.
b. Explain the purpose of the financial statements described in the text.
The purpose of the statement ... retained earnings is to explain the changes ... retained earnings that occurred ... two balance sheet dates. Usually, these changes consist ... the addition of net income (or the deduction of net loss) and the deduction of dividends paid out.
If we assume that the PROFF Company’s net income for August was $1,500 (revenues ... $5,600 less expenses ... $4,100) and that it declared and paid dividends ... $1,000. Its statement of retained earning for August is shown in Illustration 5.3.
Illustration 5. 3.
PROFF COMPANY
Statement of Retained Earnings
For the Month Ended August 31, 200X
-
Retained earnings, July 31
$2,070
Add: Net income for August
1,500
$3,570
Less: Dividends
1,000
Retained earnings, August 31
$2,570
Information ... the financing and investing activities of a business may be helpful ... appraising its continued profitability and solvency. The income statement, statement ... retained earnings, and balance sheet often do not provide ready answers ... such questions as: How much cash was generated ... operations? Why is such a profitable firm only able to pay such meager dividends? How much money was spent ... plant and equipment, and where did it come ... ? The statement of changes ... financial position - the fourth major financial statement - provides answers ... such questions. It reports the flow of funds ... and ... of a business and is often called a funds statement or a cash flow statement. The statement of cash flow is a derived statement ... the sense that it is usually prepared ... data originally collected for the balance sheet or income statement.
Cashflow statement shows money actually coming … and going … … a company … a particular period: cash inflows and outflows. It represents a restructuring and a more detailed presentation … entries found … other statements. The cashflow statement reports actual cash generated … a point … time, thus avoiding the problem … accruals. Usually, the cashflow statement breaks down the cash flow and outflow activities … three broad categories: cash … operating activities, cash … investment activities and cash … financing activities.
Net cashflow from operations is the money generated … the sales … the company’s goods or services, minus the money spent … supplies, staff salaries, etc. … the period.
Net cashflow from investment activities is the result … purchases of securities in other companies, money received … sales of securities in other companies, loans made … borrows, loans repaid and loan interest paid … borrowers, purchase … land, buildings and equipment.
Net cashflow from financing activities is the result of money received … short-term borrowing, money repaid … short-term borrowing, money received through issuing new shares and/or bonds … the company, dividends paid … shareholders.
Adding and subtracting the figures above, the company calculates its net cash position … the end of the year. Investors check the cashflow statements to see how the company is obtaining and using its cash – how much is made … its operations, how much it has raised … new share issues, etc.
Other names are sometimes used … it, including funds flow statement and source and application of funds statement.