Cash Flow Statement Page 2
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30MODULE - 6A
Cash Flow Statement
Analysis of Financial Statements
pay dividends, what message does it convey to the shareholders and public
in general. Thus, management of cash is very essential. There should be
focus on movement of cash and its equivalents. Cash means, cash in hand
and demand deposits with the bank. Cash equivalent consists of bank
overdraft, cash credit, short term deposits and marketable securities.
Notes
Cash Flow Statement deals with flow of cash which includes cash
equivalents as well as cash. This statement is an additional information to
the users of Financial Statements. The statement shows the incoming and
outgoing of cash. The statement assesses the capability of the enterprise to
generate cash and utilize it. Thus a Cash-Flow statement may be defined
as a summary of receipts and disbursements of cash for a particular period
of time. It also explains reasons for the changes in cash position of the firm.
Cash flows are cash inflows and outflows. Transactions which increase the
cash position of the entity are called as inflows of cash and those which
decrease the cash position as outflows of cash. Cash flow Statement traces
the various sources which bring in cash such as cash from operating
activities, sale of current and fixed assets, issue of share capital and
debentures etc. and applications which cause outflow of cash such as loss
from operations, purchase of current and fixed assets, redemption of
debentures, preference shares and other long-term debt for cash. In short,
a cash flow statement shows the cash receipts and disbursements during a
certain period. The statement of cash flow serves a number of objectives
which are as follows :
Cash flow statement aims at highlighting the cash generated from
operating activities.
Cash flow statement helps in planning the repayment of loan schedule
and replacement of fixed assets, etc.
Cash is the centre of all financial decisions. It is used as the basis for
the projection of future investing and financing plans of the enterprise.
Cash flow statement helps to ascertain the liquid position of the firm
in a better manner. Banks and financial institutions mostly prefer cash
flow statement to analyse liquidity of the borrowing firm.
Cash flow Statement helps in efficient and effective management of
cash.
The management generally looks into cash flow statements to understand
the internally generated cash which is best utilised for payment of
dividends.
63
ACCOUNTANCY
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