Case Flow Statement

8/6/2019 Case Flow Statement

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CASE FLOW STATEMENT

Definition:

A case flow statement can be defined as a statement, which summaries source of

cash outflows of the firm during a particular period say as month or year.

Cash Flow statement is a statement which shows inflows and outflows of ca

and its equivalent in an enterprise during a specified period of time. An enterprise prepares

Cash Flow Statement, according to the Revised According Statement 3, and present it for

each period for which financial statements are presented.

The following terms are used in the Statement with the meanings specified:

y CASH comprises cash on hand and demand deposits with banks.y 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.

y CASH FLOWS are inflows and outflows of cash and cash equivalents.

Meaning of Cash Flows Statement

Cash Flow statement reports the inflows and outflows of cash and its equivalents

of an organisation during a particular period. It reports the cash receipts and payments

classified according to the firms major activities Operating, Investing and financing. It

shows the net cash inflow or net cash outflow for each activity and for the overall business of

the firm. It reports from where cash has come and how it has been utilised. It explains the

causes for the change in the cash balance by reconciling the opening balance of the period

with the closing balance.

Cash flow statement:

A cash flow is a statement depicting change in crash position from one period to

another. The cash flow statement explains the reasons for such inflows or outflows the cash,

as the case may be, it helps management in making plans for the immediate future, A project


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cash flow statement will help management in ascertaining how much cash will be available,

to bay bank loans and to pay, dividend to the shareholders.

Utility of cash flow analysis;

A cash flow statement is useful for short term planning. Its advantages are as

follows;

y Cash flow analysis helps in evaluating financial policies and cash position.y Cash flow analysis provides information about funds, which will be available from

operations.

y It discloses the complete story of cash movement.

Advantages or Benefits or utility of cash flow statement

Cash flow statement tool of financial management in short term financial

analysis. The following are the important uses of cash flow analysis and the resultant cash

flow statement.

y Historical analysis as guide to forecasting:Cash Flow statement presents in detail the movements of cash in the recent past.

This can provide clear indications for the cash flows in the future period, thus helping in

forecasting the future commitments and needs.

y Effective cash management:Cash flow statement can act as a guide for coordinating the inflows of cash. The

Matching of the future cash receipts with payments results in effective cash management.

y Formulation of financial policies;A clear insight into the cash flows of the firm is the basis for financial policies

like dividend policy, cash discount, credit terms, etc.


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y He Preparations of cash budget;Cash flow statement is almost like the foundation for cash budget. The cash

flows in the recent past indicate the quantum and direction of such flows and form the basis

for preparing monthly or quarterly budgets for cash or even the annual cash budget for the

ensuing year.

y Short term financial decisions;Sort range financial decisions like repayment of overdraft or loans, payment of

bonus, advertising campaigns, investments outside the firm, etc., may be taken on the basis of

the analysis provided by the cash flow statement.

y Liquidity position:The liquidity position of the firm by highlighting the various sources of case and

its uses.

y Revealations:It can reveal the causes for profitable firms experiencing acute cash shortages.

The reasons for any mismanagement of case for creating such a position can be analysed and

its recurrence can be avoided.

Limitations of cash flow analysis

y Cash flow statement discloses inflows and outflows of cash alone. Thus its scope isvery limited compared to funds flows statement which reveals the changes in working

capital or the income statement which displays the overall financial position.

y Cash flow statement reveals the cash balance. But it can be easily altered bypostponing Payments for purchases or delaying collection of receivables, etc.

y Since non cash items of expenses and incomes are excluded, it cannot provided acomprehensive picture of a firms financial position.

Inspite of the limitations, cash flow statement is extensively used in

practice along with ratio analysis to obtain clear perception of the liquidity and

financial position of a firm.


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Preparation of Cash Flow Statement

Cash flow statement is prepared on the same lines as the funds flow statement,

but strictly restricted to sources and uses of cash. Preparation of the statement is

based on the opening and closing balance sheet, profit and loss account and

other relevant information.

Cash flow statement starts with the cash and bank balances at the

commencement of the period. If there is bank overdraft and cash balance, net

cash balance or net bank overdraft becomes the starting point.

The different sources of cash are added to the opening balance and the

applications of cash are subtracted. The balance represents cash bank balances

at the end of the accounting period. If a negative balance is obtained, it

represents the bank overdraft at the end of the period. The closing balance or

overdraft thus arrived at should be the same as shown in the closing balance

sheet for the accounting period.

Sources and Applications of Cash

The various sources and uses of cash are to be ascertained or computed from

the accounting statements and other information.

Computation of cash from operations

When all transactions are cash transaction: It is hypothetical situation where all

expenses incomes and revenues are paid or received in cash. In such a case, the

net profit revealed by profit and loss accounts represent cash from operations.

Net loss represents cash out flow on account of operations.

When all transactions are not cash transaction: In practice income statements

are prepared on accrual basis; several non cash items are in shown in the income

statement; credit transaction result in debtors and creditors. Opening and closing

inventories are to be accounted for.

In such situation, cash from operations is ascertained in two stages.

Computation of funds from operations (just as in the case of a funds

flow statement)


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Computation of case from operations by adjusting the current assets

and liabilities except cash and bank balance in the funds from operations.

Computation of funds from operation

This is done in the same way as was explained in the funds flow

analysis. An adjusted profit and loss account may be prepared or a statement of

funds from operations can be prepared, with the net profit revealed by the profit

and loss account as the starting point. The following items are added back to the

profit shown by the profit and loss account.

Depreciation on fixed assets because it decreases profit without any cash

outflow.

Calculation of cash from operations

The net profit shown by an income statement is on Accrual basis. It is essential

to convert the various items affecting the profit into cash basis. Ascertaining funds from

operations has accomplished this task to some extent by adding back to the net profit all non

cash expenses shown in profit and loss account and subtracting the non cash incomes.

The funds from operations need further adjustment to be converted fully to cash

basis. For this purpose all the current assets and current liabilities except cash and bank

balance are to be analysed from the point of view of their impact on cash.

The following explanations should clarify the effect of the changes in the current

assets and current liabilities on the cash flows.

y Effect of credit sales and Debtors on cash flowBoth cash sales and credit sales increase the revenues of a business and the funds

from the operations and net profit are proportionately more. But cash inflow is not improved

by the credit sales immediately. Thus both cash sales and credit sales can increase funds byincreasing the cash and debtors balances. But cash balance goes up to the extent of cash sales

only. However when debtors are collected later on, cash inflows go up without any increase

in the founts because the working capital is not affected.


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The debtors created through credit sales, thus, affect funds and cash at different

times. Cash from operations through credit sale transactions can be presented as follows:

Cash from operations = Net profit + Opening debtors [presumed as collected]

-Closing debtors.

[or]

Cash from operations=Net profit +Decrease in debtors-Increase in debtors.

y Effect of credit purchases and creditors on cash flowsCash paid for purchases reduces case balance and results in immediate cash out

flow. Credit purchases creates trade creditors, thus decreasing the working capital or the

founts. But cash is not immediately affected. When the creditors are paid later on, the

cash out flow takes place.

Cash outflow through credit purchases can be summed-up as follows

Cash from operations = Net profit + Closing creditor Opening creditors

[presumed to be paid off]

[or]

Cash from operations = Net profit + increase in creditors Decrease in

Creditors.

y Effect of unsold goods in stock on cash flow: The opening stock shown on the debit side of income statement reduces the net

profit without affecting the cash flow. Similarly the closing stock credited to the income

statement increases the net profit without actually increasing cash inflows.

Effect of changes in stock on cash from operations can be summarised as under:

Cash from operations = Net profit + Opening stock Closing stock.

[or]

Cash from operations = Net profit +Decrease in stock


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[or]

-Increase in stock.

y Effect of outstanding expanses and incomes received in advance:Outstanding expenses are debited to the income statement through they are not

yet paid. Thus net profit reduces, without actually resulting in cash outflow. Similarly

incomes received in advance are subtracted from the income heads concerned, thus reducing

the net profit. But the income received in advance has already resulted in cash inflow, though

not reflected in the profit.

Effect of changes in outstanding expenses and incomes received in advance on

the cash from operations can be presented as follows:

Cash from operation = Net profit +Closing outstanding expenses and income

received in advance Opening outstanding expenses and

income received in advance.

[or]

Cash from operation = Net profit + Increase in outstanding expenses and income

received in outstanding expenses and income received in

advance.

Effect of prepaid expenses and accrued income:

Prepaid expenses are reduced from the expenses concerned in the statement. So,

they are not charged to profit and the profit is more to that extent, though cash for them is

already paid. Similarly, accrued incomes are shown as incomes in the income statement,

thereby increasing the net profit. But no ca sh is received for them and cash inflow has not

gone up.

Effect of changes in the prepaid expenses and accrued incomes on the cash from

operation can be presented as follows:

Cash from operations = Net profit + Opening accrued incomes and prepaid

expenses Closing prepaid expenses and accrued

incomes.


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Cash from operations = Net profit + Decrease in accrued incomes and prepaid

expenses [or] increase in accrued incomes and

prepaid expenses.

Documents

Case Flow Statement