Cash Flow Statement

Q.1. What do you mean by Cash Flow Statement? Answer: A Cash Flow Statement is similar to the Funds Flow Statement, but while preparing funds flow statement all the current assets and current liabilities are taken into consideration. But in a cash flow statement only those sources of funds are taken which provide cash and only the uses of cash are taken into consideration, even liquid asset like Debtors and Bills Receivables are ignored. A Cash Flow Statement is a statement, which summarises the resources of cash available to finance the activities of a business enterprise and the uses for which such resources have been used during a particular period of time. Any transaction, which increases the amount of cash, is a source of cash and any transaction, which decreases the amount of cash, is an application of cash. Q.2. What are the objectives of Cash Flow Statement? Answer: A Cash Flow Statement provides very useful help to financial management of a business enterprise. It summarises the sources from where the cash may be obtained and the specific uses to which the cash may be applied during a particular period of time. A Cash Flow Statement has the following uses: Helpful in short-term financial planning: Cash Flow Statement provides useful information to a business enterprise to make decision for its short-term financial planning. Helpful in preparing Cash Budget: A Cash Budget is an estimate of cash receipts and disbursement for a future period of time. Cash Flow Statement provides help to the management to prepare Cash Budget. A comparison of cash budget and cash flow statement reveals the extent to which the sources of the business were generated and used as per the plans of the business. Helps to understand liquidity: Liquidity means ability of a business enterprise to pay off its liabilities when due. Cash Flow Statement helps to know about the sources where from the cash will be available to pay off the liabilities. Prediction of sickness: With the help of preparing cash from operation a business enterprise may come to know about cash losses in operation. It helps to predict this type of sickness. Dividend decisions: Dividend is paid within 42 days, when company declares it. Cash Flow Statement helps the management to know about the sources of cash to pay off dividend.

Q.3. What are the sources and uses of Cash? Answer: The major sources of cash are as under: Cash from Operation Issue of Equity Share Capital for cash Issue of Preference Share Capital for cash Raising long term loans for cash Sale of Investments Sale of Fixed Assets Premium on Issue of Shares / Debentures etc. The major uses of cash are as under: Redemption of Preference Share Capital for cash Redemption of Debentures/ Repayment of Long-term Loans Purchase of Investment Purchase of Fixed Assets Premium on Redemption of Preference Share/Debentures Dividend Paid Taxes Paid etc. Q.4. Differentiate between a cash flow statement and a funds flow statement. (CBSE) Answer: Difference between Funds Flow Statement and Cash Flow Statement Basis of Difference 1. Basis of Analysis Funds Flow Statement Cash Flow Statement

Funds flow statement is based Cash flow statement is based on on broader concept i.e. narrow concept i.e. cash, which is working capital. only one of the elements of

working capital. 2. Source Funds flow statement tells about the various sources from where the funds generated with various uses to which they are put. Cash flow statement stars with the opening balance of cash and reaches to the closing balance of cash by proceeding through sources and uses.

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Usefulness

Funds flow statement is more Cash flow statement is useful in useful in assessing the long- understanding the short-term range financial strategy. phenomena affecting the liquidity of the business. In funds flow statement changes in current assets and current liabilities are shown through the schedule of changes in working capital. Funds flow statement shows the causes of changes in net working capital. Funds flow statement is consonant with the accrual basis of accounting. In cash flow statement changes in current assets and current liabilities are shown in the cash flow statement itself. Cash flow statement shows the causes the changes in cash. In cash flow statement data obtained on accrual basis are converted into cash basis.

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Schedule of Changes in Working Capital

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Causes

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Principal of Accounting

Cash Flow Statement : Statement showing changes in inflow & outflow of cash during the period. Methods of cash flow: 1.Direct Method : presenting information in:Statement of A. operating Activities, B. Investment Activities C.Financial Activities 2.Indirect Method :uses net income as base & make adjustments to that income(cash & non-cash)transactions. Funds Flow Statement :Statement showing the sorce & application of funds during the period. Major Difference: The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent. FFS is showing the fund for the future activites of the Company.

There are new differenceA distinction between these two statements may be briefed as under:(i) Funds Flow Statement is concerned with all items constituting funds (Working Capital)for the business while Cash Flow Statement deals only with cash transactions. In other words, a transaction affecting working capital other than cash will affect Funds statement, and not the Cash Flow Statement. (ii) In Funds Flow Statement, net increase or decrease in working capital is recorded while in Cash Flow Statement, individual item involving cash is taken into account. (iii) Funds Flow statement is started with the opening cash balance and closed with the closing cash balance records only cash transactions. (iv) Cash Flow Statement is started with the opening cash balance and closed with ht closing cash balance while there a no opening or closing balances in Funds Flow Statement

Cash Flow Statement : Statement showing changes in inflow & outflow of cash during the period. Methods of cash flow: 1.Direct Method : presenting information in Statement of A. operating Activities B. Investment Activities C.Financial Activities 2.Indirect Method :uses net income as base & make adjustments to that income(cash & non-cash)transactions. Funds Flow Statement :Statement showing the source & application of funds during the period.

Major Difference: The Cash Flow S tatement allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent. Fund Flow Statement is showing the fund for the future activites of the Company