CASH FLOW STATEMENT – AN OVERVIEW:

Cash always plays an important role in the entire life of business. It is essential to meet day to day working requirements, long term investment, paying off interest and other expense and also dividend to shareholders.

Cash flow on the other hand defined as movement of cash or cash equivalents within the business known as inflow of cash or outside the business known as outflow of cash. The firm is required to make estimates about future needs of cash so as to determine the availability of cash. The actual availability of cash must be compared with estimated needs so as to invest the surplus and meet the deficit cash.

Being an important part of the financial statement of an enterprise, cash flow statement records the movement of cash or cash equivalents during a particular period. The statement basically indicates the source and application of cash.

Cash flow is classified under the following 3 categories:

  • OPERATING ACTIVITIES:

The cash flow from operating activities indicates the extent to which main operations of business such as manufacturing of goods or providing of services generate. It includes the following main items:

Operating cash receipts from

  1. cash sales
  2. Any commission received
  3. Cash received from customers

Operating cash payments through

  1. Cash purchase
  2. cash to suppliers
  3. other business expenses
  • INVESTING ACTIVITIES:

The cash flow from investing activities indicates the extent to which expenditure is made in order to generate future income. It includes the following main items:

  1.  sale or purchase of fixed assets
  2.  sale or purchase of intangible assets
  3.  sale or purchase of investment
  4. rent income etc.
  • FINANCING ACTIVITIES:

The cash flow from financing activities indicates the claims on future cash flows by the persons providing funds in present. It includes the following main activities:

  1. Any dividend paid
  2. Any interest amount paid
  3. repayment of loan
  4. Redemption of debentures or preference shares etc.

 

IMPORTANCE OF CASH FLOW STATEMENT:

  1. Cash flow statement is helpful in evaluating cash position of a firm.
  2. It plays a significant role in making capital budgeting decisions.
  3. It provides a detailed analysis by classifying the business activities under different categories.
  4. It helps the management in long term planning of cash, repayment of loan or replacing assets etc.
  5. It also helps the management in determining that whether the liquidity position of business is improving or deteriorating over a period of time.
  6. It is also helpful in planning effectively and efficiently the company’s financial operations.

 

LIMITATIONS OF CASH FLOW STATEMENT:

  1. Cash flow statement is prepared on extreme cash basis hence, ignores the important concept of accrual basis accounting.
  2. It is not helpful in providing overall position of a concern as it takes only cash items and ignores the non-cash items.

 

 

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