MEANING AND DEFINITION
Financial statements
of an enterprise include an income statement, which shows the operating result,
and a balance sheet, which shows the financial position. For the betterment of
decision making additional statements are prepared to analyze the change in the
financial position of the enterprise over the accounting period. These
statements of change in the financial position include funds flow statement, cash
flow statement and ratio analysis, etc. Cash is the blood of a business.
Without sufficient cash, the business cannot run properly.
Cash flow is the flow
of cash in an accounting year or over two dates of balance sheet. Cash flow
statements show the inflows and outflows of cash from different business
activities like operating, investing, and financing activities. It is the
indicator of the amount of cash receipt and amount of cash payment or
disbursement during an accounting period in different activities of an organization.
It shows the causes of the increase or decrease in cash and net change in cash
position during a particular period.
Cash flow is one of
the compulsory financial statements that should be prepared with other
financial statements. As per company act,2063, in the case of a public limited
company, the cash flow statement must be prepared annually 30 days prior to the
annual general meeting but in the case of a private limited company, it should
be prepared within 60 days from the end of the accounting period.
IMPORTANT OF CASH FLOW
STATEMENT
The statement of cash
flow statement provides information regarding inflows and outflows of cash of a
firm for a period of one year. Therefore, the cash flow statement is important
on the following grounds.
· To identify the
sources from where cash inflows have risen within in a particular period.
· To show the various
activities wherein the cash was utilized.
· To plan cash in a systematic
method and maintain a proper matching between cash inflows and outflows.
· To show the efficiency
of the firm in generating cash inflows from its regular operations.
· To reports, the amount
of cash used during the period in various long-term investing activities such
as the purchase of fixed assets.
· To reports, the amount
of cash received during the period through various financing activities such as
the issue of shares, debentures, and raising long-term loans.
· To helps for appraisal
of various capital investment programs to determine their profitability and
viability.
DIFFERENCES BETWEEN
CASH FLOW STATEMENT AND FUNDS FLOW STATEMENT
|
CASH FLOW STATEMENT |
FUNDS FLOW STATEMENT |
|
Cash flow statement is based on the
narrow concept of funds, which considers changes in cash. |
It is based on the changes in
working capital, which considers both the changes in cash as well as other
components of current assets and current liabilities. |
|
It is prepared on a cash basis. |
It is prepared on an accrual
basis. |
|
It does not require the use of
changes in net working capital because all the changes in assets and
liabilities are summarized in cash flow statement. |
It requires using a separate
statement of changes in net working capital. |
|
The preparation of cash flow
statement considers only those transactions that are linked with flow of
cash. |
The preparation of funds flow
statement considers those transactions that are linked with the flow of funds
along with actual cash. |
|
This statement is more useful in
short-term analysis and cash planning. |
This is more useful in long-term
analysis of financial planning. |
PREPARATION OF CASH
FLOW STATEMENT
The cash flow
statement is prepared by showing inflows and outflows of cash from major
activities of a firm. The activities that result in cash inflows are referred
to as a source of cash and the activities that result in cash flow outflow are
referred to as uses of cash. The firm’s activities are classified into 3
categories. They are:
1.Cash flows from
operating activities
2.Cash flows from
investing activities
3.Cash flow from
financing activities
Cash flow from
operating activities
Operating activities
refer to the day-to-day revenue-generating activities of a firm. These
activities are considered to be the major sources of internally generated cash.
Cash inflows from operating activities include the cash from sales and
collection from debtors. Cash outflows for operating activities include cash
purchase, payment of suppliers, payment for other operating expenses, payment
for interest and taxes thus consist of all cash revenue expenses.
Cash flows from operating
activities could be determined by using two methods. Direct and indirect method
1.Cash flow from
operating activities under direct method
Under the direct
method, only those items from income statement are selected that result in the actual
flow of cash. So, non-cash expenses such as depreciation and amortized amount
appeared in the income statement are ignored. The change in some components of
current assets and current liabilities except cash balance has also
incorporated that result in cash inflows and outflows.
A.Cash sales and
collection from debtors
It includes cash from
sales and cash inflows or outflows resulted from a change in debtors and bills
receivable.
B.Cash purchases and
payment to suppliers
It includes cash
inflow resulted from the purchase of raw materials or the cost of goods sold.
The changes in creditors and bills payables of two balance sheet dates are
adjusted to the amount of purchase of raw materials or the cost of goods sold.
C.Payment to employees
and other operating expenses
It includes cash
outflow resulted from payment of wages, salaries, manufacturing expenses,
administrative expenses, selling and distribution expenses, including insurance
and other operating expenses.
D.Payment for interest
and taxes
It includes the cash outflow
occurring out of payment of interest and taxes. The change in outstanding
interest and taxes are also included.
E.Cash from
extra-ordinary activities
It includes all the
cash inflows and outflows arising on account of short-term investment and short-term
financings such as short-term bank loans, bank overdraft, and marketable
securities.
2.Cash flows from
operating activities under indirect method
Under the indirect
method first, the funds from the operation are ascertained by adjusting the net
income by non-cash expenses and non-operating incomes and expenses included in
the income statement. The funds from the operation so ascertained are again
adjusted by the changes in current assets and the changes in current
liabilities to determine cash flows from operating activities.
To apply this method
all the amount of non-operating and non-cash expenses are added to the net
income and then the amount of non-operating incomes are deducted. The resulting
figure is known as funds from operation. The changes in current assets, other
than cash, and the changes in current liabilities are adjusted to funds from the
operation so that the resulting figure is known as cash from operating
activities.
Cash flow from investing
activities
Investing activities
refer to those activities, which are concerned with the acquisition or sales of
long-term assets or investment. Cash inflows from investing activities include
the cash received from sales of fixed assets as well as investment and cash
outflows include cash paid for the purchase of fixed assets and investment
made.
Cash flow from
financing activities
Financing activities
are concerned with cash collection by issuing shares and debentures, raising
long-term loans and so on. It also involves cash outflows in terms of
redemption of debentures and preference shares, repurchase of shares, repayment
of long-term loans and payment of cash dividend.
Reviewed by Bijay Munikar
on
March 15, 2021
Rating:
No comments: