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Cash Flow Statement

Ravi Yadav
07/06/2017 0 0

Purpose of a statement of cash flows:

  • To provide information about the cash inflows and outflows of an entity during a period.
  • To summarize the operating, investing, and financing activities of the business.
  • The cash flow statement helps users to assess a company’s liquidity, financial flexibility, operating capabilities, and risk.

The statement of cash flows is useful because it provides answers to the following important questions:

  • Where did cash come from?
  • What was cash used for?
  • What was the change in the cash balance?

Specifically, the information in a statement of cash flows, if used with information in the other financial statements, helps external users to assess:
1. A company’s ability to generate positive future net cash flows,
2. A company’s ability to meet its obligations and pay dividends,
3. A company’s need for external financing,
4. The reasons for differences between a company’s net income and associated cash receipts and payments, and
5. Both the cash and noncash aspects of a company’s financing and investing transactions.

Cash flow statement:

A statement of cash flows contains information about the flows of cash into and out of a company, and the uses to which the cash is put. The statement is comprised of three sections, in which are presented the cash flows that occurred during the reporting period relating to the following:

  • Operations
  • Investing activities
  • Financing activities

The statement of cash flows is part of the financial statements, and as such is heavily reviewed by the users of the financial statements.

Cash flow statement is a statement which shows the sources of cash inflow and uses of cash out-flow of the business concern during a particular period of time. It is the statement, which involves only short-term financial position of the business concern. Cash flow statement provides a summary of operating, investment and financing cash flows and reconciles them with changes in its cash and cash equivalents such as marketable securities.

1. Cash flow statement is the report showing sources and uses of cash.
2. Cash flow statement explains the inflow and out flow of cash during the particular period.
3. The main objective of the cash flow statement is to show the causes of changes in cash between two balance sheet dates.
4. Cash flow statement indicates the factors contributing to the reduction of cash balance in spite of increase in profit and vice-versa.
5. In a cash flow statement only cash receipt and payments are recorded.
6. Cash flow statement starts with opening cash balance and ends with closing cash balance.

Explain how cash flow statements differ from cash budgets:

  • Cash Flow Statement
  • Based on historical data
  • An account of the directors'
  • Cannot (legally) be manipulated Management
  • A requirement for companies
  • Produced annually
  • Presented in a standard format
  • Cash Budget

Based on future plans:

  • For internal use stewardship of funds
  • Can be adjusted to reflect policy
  • Desirable for management purposes
  • Can be prepared for any period
  • No formal lay-out is required
  • Explain how a company can make a loss but still have an increase in cash.
  • General discussion of the differences between cash and profit:
  • Timing differences – profits are recorded in the profit and loss account when the transaction is made but the cash may not be received for some time.
  • Other payments – payments for fixed assets result in cash leaving the business but do not reduce profit.
  • Other receipts – share issues or loans received will increase cash but are not shown in the profit and loss account.
  • Non-cash items – provisions are made in the profit and loss account that do not involve the movement of cash e.g. depreciation.

Explanation of how a company can make a loss and still increase cash balance:
Non-cash items: provisions for depreciation or bad debts will reduce the profit figure but have no effect on cash for example.

Timing differences:

  • The company may have recorded purchases but not paid for them yet for example.
  • Other receipts: The company may have issued shares or taken out loans during the year and these will increase the cash balance but not affect the profit figure for example.
  • Discuss the extent to which cash is more significant for business survival than profit.
  • Cash is essential for short term survival. Without cash, a business may not be able to meet its liabilities and therefore may lose profit or even be forced into liquidation by its creditors. Also the business may not be able to pay dividends and hence lose the confidence of shareholders.
  • Profit is needed for long term survival to ensure that funds are generated to enable the business to invest and to pay dividends to shareholders.
  • Explain to what extent a cash flow statement is essential in judging the financial performance of a company.
  • Focus on cash

The cash flow statement focuses on cash. Cash is the lifeblood of a business. It is possible for a business to survive for a significant period of time whilst making losses, however, without cash a business can fail quickly. Profit can be distorted, but cash is more difficult to manipulate.

Cash is also seen as being a more certain figure and harder to manipulate, therefore it may be seen as a more accurate measurement of business success or failure. Profit can be distorted because decisions need to be made about: Examples such as recognition of sales distinguishing between capital and revenue expenditure depreciation.

Profit is significant: Investors are interested in profit as this is the source of dividends and significant for the long term survival of the business.

Judgment: The cash flow statement is important in judging the financial performance of the business - it shows:
liquidity, solvency, financial adaptability. However, the remaining statements also show significant information e.g.profits/losses and assets and liabilities.

Explain why public companies publish cash flow statements.

  • Cash flow statements are published to comply with FRS1.
  • Cash flow statements provide information that is not contained in the profit and loss account and balance sheet. They are necessary to provide a fuller understanding of business performance.
  • Cash is seen as a more certain figure than profit as it is easier to verify and less subject to estimation plus example.
  • Cash flow statements focus on cash, which is essential to the short-term survival of business.
  • They show the uses of finance.
  • They show the sources of finance: internal and external and long and short term; they show how much cash is generated from trading and how much from other sources.
  • This allows the users of accounts to make more informed judgments about business performance.


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