Financial Statements by Business Entities. The Purpose Essay

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financial statements by business entities. The purpose of this is so that one can understand about the business cash, how the business acquired or generated it, how it was used and in what ways and tomorrow's business plans, financial position of a business, performances and its position. The paper will go ahead to analyze if there is any significance of cash for the survival of a business and the impacts of the various financial sets. The arguments that will prevail will be based on the importance of the different financial statements to a business survival.

Cash is a crucial constituent of a business and I do agree that a business cannot survive without it. 'As a matter of fact the main aim and goal of a business is to generate cash and profits not only in the short run but also in the long-term.' (Minnery, 2006) Every business has everyday costs which must be met with cash in order to keep the business moving. These costs include but are not limited to wages and salaries, paying creditors, settling of taxes such as VAT and PAYE. A business can never escape to pay for these expenses and failure to do so amounts to defaulting something that is likely to destroy the business, it would also amount to gross breach of faith to employees if their wages and salaries are not settled, and also result to insolvency if the company is unable its taxes and to the creditors who supplies the business, they are likely to terminate supplies.

To escape insolvency, a business must have cash so as to aid pay its creditors and on time. Failure to meet creditor's expectations has serious consequences and it can result to prosecution. Therefore to survive, as much as a company is in need of making profits having cash to pay debts is important. Equally, a profitable business should have its profit reflected in its cash flow. If it fails to generate cash the end results are likely that it will inevitably run out of money. Minnery, (2006) points out to the importance of cash in a business by saying 'Cash is very imperative to a business both in the short and in the long-term. There is no evading from the cash situation. But never the less some profitable companies have in some point operated without cash but again it is only for a while.' A business that wants to retain its cash flow should from inception ensure that there is cash.

And when we come to the issue of cash flow statement supplementing the other two (income statement and financial position of a business) Elliot (2005) points out that 'Cash flow statement is the new kid in the block among the financial sets. As for the statement of financial position and the income statement, these two documents need modification; something has been catered for in the cash flow statement. Income statement is thus different from the statement of financial position and income statement in that income statement format is more advanced than the two. As a matter of fact Cash flow is the ultimate document that is prepared in the financial report set. It goes ahead to provide information that is a direct flow of information from the Income statement, and statement of financial position; hence it adding reliability and accountability to the financial Statements.

The cash flow is better placed to establish the financial health of a business. It is the final document to be prepared with the analysis of the financial status of the business. It gives more important and valid information, not found with the other two. 'Unlike the statement of financial position, which only reflects financial situation and financial status of a business not to mention financial changes during a period of time, cash flow statement extends further to analyze the financial health doing more analysis.' (Graham 1998) Statement of cash flows thus compliments the rest by providing additional credibility to the financial information. Cash flow statement includes three major categories namely; investing activities, operating activities and financing activities. And not only that, but cash flow statement extends it functionality to include exchange of money between a…

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Works Cited

Elliot.B, 2005, Financial Accounting and Reporting; Financial Times/Prentice Hall, United Kingdom

Graham B. 1998, The Interpretation of Financial Statements Harper Business, amazon

Minnery.B. 2006, 'Don't question the importance of cash flow' The independent, viewed date 28 May 2006, 2009, The importance of cash flow statement; viewed; Aug 19, 2009

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