To understand the cash situation, the cash flows statement is an additional report included in financial statements to basically convert the accrual basis balance sheet and income statement into a cash basis report. This way, management gets the best attributes of both accrual and cash basis accounting.
Cash Flows Statement
The cash flows statement is one of the five respective financial statements issued by businesses. The cash flows statement converts accrual accounting information into a cash basis report keying in on three distinct areas of cash. This includes cash from regular operations, cash flow from investing (purchase/sale of fixed assets) and financing.
n a pure cash only operation, the profit as reported on the income statement would also be cash flow from operations. But modern-day business is not pure in how it is conducted. Companies agree to pay suppliers at a later time, payroll is weekly or monthly, benefits that are paid in the future are offered to employees, credit is extended to customers; the list can go on and on.
Another leverage ratio used to evaluate the financial integrity of a business is the debt to equity ratio. It is strictly a bottom half balance sheet ratio. Its result explains the relationship of volume of debt and corresponding equity to finance the operations of a business, i.e. the purchase of assets.