CASH FLOW STATEMENT
MEANING
A simple definition of a cash flow statement is a statement which discloses the changes in cash position
between the two periods. Along with changes in the cash position the cash flow statement also
outlines the reasons for such inflows or outflows of cash which in turn helps to analyze the
functioning of a business.
DEFINITION
1) Cash comprises cash on hand and demand deposits with banks.
2) Cash equivalents are short term highly liquid investments that are readily convertible into
known amounts of cash and which are subject to an insignificant risk of changes in value.
3) Cash flows are inflows and outflows of cash and cash equivalents.
4) Operating activities are the principal revenue-producing activities of the enterprise and other
activities that are not investing or financing activities.
5) Investing activities are the acquisition and disposal of long-term assets and other investments
not included in cash equivalents.
6) Financing activities are activities that result in changes in the size and composition of the owners’
capital (including preference share capital in the case of a company) and borrowings of the
enterprise.
UTILITIES OF CASH FLOW ANALYSIS
The cash flow statement is an important planning tool in the hands of management. A cash flow
statement is useful for short-term planning.
A business enterprise needs sufficient cash to meet its various obligations in the near future such as
payment for purchase of fixed assets, payment of debts maturing in the near future, expenses of the
business, etc. A historical analysis of the different sources and applications of cash will enable the
management to make reliable cash flow projections for the immediate future. It may then plan out
for investment of surplus or meeting the deficit, if any.
Its chief advantages and utility are as follows:
Helps in Efficient Cash Management: - It helps to determine how much cash will be
available at a particular point of time to meet obligations like payment to trade creditors,
repayment of cash loans, dividends, etc. This helps to provide information about the liquidity
and solvency information of an enterprise.
Helps in Internal Financial Management: - A proper planning of the cash resources will
enable the management to make available sufficient cash whenever needed and invest
surplus cash, if any in productive and profitable opportunities.
Discloses the Movements of Cash: - It helps in understanding and analysis of what are the
sources and application of the cash for a company. Also it discloses the volume as well as
the speed at which the cash flows in the different segments of the business, there by
helping to analyze the different segments of the business.
Historical versus Future Estimates: - Historical cash flow information is often used as an indicator
of the amount, timing and certainty of future cash flows.
, Discloses the Success or Failure of Cash Planning: - It helps in determining how efficiently
the cash is being managed by the management of the business.
Comparison Between Two Enterprises: - Cash flow information is useful in assessing the ability of
the enterprise to generate cash and cash equivalents and enables users to develop models to
assess and compare the present value of the future cash flows of different enterprises. It
enhances the comparability of the reporting of operating performance by different
enterprises because it eliminates the effects of using different accounting treatments for
the same transactions and events.
Analysis of Profitability vis-à-vis Net Cash Flow: - It is also useful in examining the
relationship between profitability and net cash flow.
LIMITATION OF CASH FLOW ANALYSIS
Cash flow analysis is a useful tool of financial analysis. However, it has its own limitations.
These limitations are as under:
Cash flow statement cannot be equated with the Income Statement. An Income Statement
takes into account both cash as well as non-cash items and, therefore, net cash flow does
not necessarily mean net income of the business.
The cash balance as disclosed by the cash flow statement may not represent the real liquid
position of the business since it can be easily influenced by postponing purchases and
other payments.
Cash flow statement cannot replace the Funds Flow Statement. Each of them has a
separate function to perform.
In spite of these limitations, it can be said that cash flow statement is a useful supplementary
instrument.
The technique of cash flow analysis, when used in conjunction with ratio analysis, serves as a
barometer in measuring the profitability and financial position of the business.
CASH AND CASH EQUIVALENTS
Cash equivalents are held for the purpose of meeting short-term cash commitments rather than
for investment or other purposes. For an investment to qualify as a cash equivalent, it must be
readily convertible to a known amount of cash and be subject to an insignificant risk of
changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it
has a short maturity of say, three months or less from the date of acquisition.
Investments in shares are excluded from cash equivalents unless they are, in substance, cash
equivalents; for example, preference shares of a company acquired shortly before their specified
redemption date (provided there is only an insignificant risk of failure of the company to repay
the amount at maturity).
PRESENTATION OF CASH FLOW STATEMENT
The cash flow statement should report cash flows during the period classified into
followingcategories: -
a. Operating activities
b. Investing activities
c. Financing activities
MEANING
A simple definition of a cash flow statement is a statement which discloses the changes in cash position
between the two periods. Along with changes in the cash position the cash flow statement also
outlines the reasons for such inflows or outflows of cash which in turn helps to analyze the
functioning of a business.
DEFINITION
1) Cash comprises cash on hand and demand deposits with banks.
2) Cash equivalents are short term highly liquid investments that are readily convertible into
known amounts of cash and which are subject to an insignificant risk of changes in value.
3) Cash flows are inflows and outflows of cash and cash equivalents.
4) Operating activities are the principal revenue-producing activities of the enterprise and other
activities that are not investing or financing activities.
5) Investing activities are the acquisition and disposal of long-term assets and other investments
not included in cash equivalents.
6) Financing activities are activities that result in changes in the size and composition of the owners’
capital (including preference share capital in the case of a company) and borrowings of the
enterprise.
UTILITIES OF CASH FLOW ANALYSIS
The cash flow statement is an important planning tool in the hands of management. A cash flow
statement is useful for short-term planning.
A business enterprise needs sufficient cash to meet its various obligations in the near future such as
payment for purchase of fixed assets, payment of debts maturing in the near future, expenses of the
business, etc. A historical analysis of the different sources and applications of cash will enable the
management to make reliable cash flow projections for the immediate future. It may then plan out
for investment of surplus or meeting the deficit, if any.
Its chief advantages and utility are as follows:
Helps in Efficient Cash Management: - It helps to determine how much cash will be
available at a particular point of time to meet obligations like payment to trade creditors,
repayment of cash loans, dividends, etc. This helps to provide information about the liquidity
and solvency information of an enterprise.
Helps in Internal Financial Management: - A proper planning of the cash resources will
enable the management to make available sufficient cash whenever needed and invest
surplus cash, if any in productive and profitable opportunities.
Discloses the Movements of Cash: - It helps in understanding and analysis of what are the
sources and application of the cash for a company. Also it discloses the volume as well as
the speed at which the cash flows in the different segments of the business, there by
helping to analyze the different segments of the business.
Historical versus Future Estimates: - Historical cash flow information is often used as an indicator
of the amount, timing and certainty of future cash flows.
, Discloses the Success or Failure of Cash Planning: - It helps in determining how efficiently
the cash is being managed by the management of the business.
Comparison Between Two Enterprises: - Cash flow information is useful in assessing the ability of
the enterprise to generate cash and cash equivalents and enables users to develop models to
assess and compare the present value of the future cash flows of different enterprises. It
enhances the comparability of the reporting of operating performance by different
enterprises because it eliminates the effects of using different accounting treatments for
the same transactions and events.
Analysis of Profitability vis-à-vis Net Cash Flow: - It is also useful in examining the
relationship between profitability and net cash flow.
LIMITATION OF CASH FLOW ANALYSIS
Cash flow analysis is a useful tool of financial analysis. However, it has its own limitations.
These limitations are as under:
Cash flow statement cannot be equated with the Income Statement. An Income Statement
takes into account both cash as well as non-cash items and, therefore, net cash flow does
not necessarily mean net income of the business.
The cash balance as disclosed by the cash flow statement may not represent the real liquid
position of the business since it can be easily influenced by postponing purchases and
other payments.
Cash flow statement cannot replace the Funds Flow Statement. Each of them has a
separate function to perform.
In spite of these limitations, it can be said that cash flow statement is a useful supplementary
instrument.
The technique of cash flow analysis, when used in conjunction with ratio analysis, serves as a
barometer in measuring the profitability and financial position of the business.
CASH AND CASH EQUIVALENTS
Cash equivalents are held for the purpose of meeting short-term cash commitments rather than
for investment or other purposes. For an investment to qualify as a cash equivalent, it must be
readily convertible to a known amount of cash and be subject to an insignificant risk of
changes in value. Therefore, an investment normally qualifies as a cash equivalent only when it
has a short maturity of say, three months or less from the date of acquisition.
Investments in shares are excluded from cash equivalents unless they are, in substance, cash
equivalents; for example, preference shares of a company acquired shortly before their specified
redemption date (provided there is only an insignificant risk of failure of the company to repay
the amount at maturity).
PRESENTATION OF CASH FLOW STATEMENT
The cash flow statement should report cash flows during the period classified into
followingcategories: -
a. Operating activities
b. Investing activities
c. Financing activities
