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Your friend, Diana Wood, recently completed the second year of her business and just received annual financial statements from her accountant. Wood finds the income statement and balance sheet informative but does not understand the statement of cash flows. She says the first section is especially confusing because it contains a lot of additions and subtractions that do not make sense to her. Wood adds, "The income statement tells me the business is more profitable than last year and that's most important."
Problem 1: Write memorandum to your friend explaining the purpose of the statement of cash flows.
Problem 2: Why is the first section confusing and how might it be rectified.
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