Cash Flow Statement:

Cash is a life blood of business. Cash flow statement is important tool of cash planning and control. A
organization or firm receives cash from various sources like sales, debtors, sale of assets investments
etc. Like, the organization or firm needs cash to make payment to salaries, rent dividend, interest etc.

Cash flow statement is that statement which that inflow and outflow of cash during a particular
period. It is prepared on the basis of past data showing the inflow and outflow of cash.

Objectives of Cash Flow Statement

1. To state the causes of changes in cash balance between the balance sheet dates.

2. To show the actors contributing to the reduction of cash balance inspire of increasing of profit

or decreasing profit.

Uses of Cash Flow Statement

1. It explains the reasons for low cash balance in business.

2. It shows the major sources and uses of cash by organization.

3. It helps in short term financial decisions relating to liquidity of organization.

4. From the past year statements projections can be made for the future decisions.

5. It helps the management in planning the repayment of loans, credit arrangements etc.

Steps in Preparing Cash Flow Statement

1. Opening of accounts for non-current items of (to find out the hidden information).

2. Preparation of adjusted Profit and Loss account (to find out cash from operation or profit, and

cash lot in operation or loss).

3. Comparison of current items to find out cash inflow or outflow.

4. Preparation of Cash Flow Statement.

To prepare Account for all non-current items is easy for preparing Cash Flow Statement.

Cash from operation can be prepared also by using this formula .

Net Profit + Decrease in Current Asset - Increase in Current Asset

OR OR

Increase in Current Liabilities Decrease in Current Liabilities.

Usefulness of the Statement of Cash Flows

The information of cash flows should help investors, creditors, and others assess the following aspects
of the firm’s financial position.

• The entity’s ability to generate future cash flows of organization.

By finding relationships between items in the cash flow statement, investors and others can

make assumptions of the amounts, timing, and uncertainty of future cash flows better than

they can from accrual basis data.

• The entity’s ability to pay dividends and meet obligations in right way.

If a company does not have adequate cash, employees cannot be paid, debts settled, or

dividends paid. Employees, creditors, and stockholders should be particularly interested in

cash flow statement, because it alone shows the flows of cash in a business.

• The cash investment and financial transactions during the period.

By checking company’s investing and financing transactions, a financial statement analyst

can better understand why assets and liabilities changed during the period.

1. The reason for the difference between net income and net cash of statement

Net income statement provides information on the success or failure of a business enterprise.

Some are critical of accrual basis net income because it requires many assumptions. As a

result, the reliability of the number is often challenged. Such is not the case with cash. Many
 users of the statement of cash flows want to know the reasons for the changes and difference

between net income and net cash provided by operating activities.

Cash flows is useful in answering the following questions.

 How did cash increase when there was a net loss for the period?

 How were the proceeds of the bond issue used?

 How were the expansions in the plant and equipment financed?

 Why were dividends not increased?

 How was the retirement of debt accomplished?

 How much money was borrowed during the year?

 Is cash flow greater or less than net income?

Cash Flow Statement

 Inflow of Cash Amount Outflow of cash Amount
Open amount cash Redemption of
### ###
balance preference shares

Redemption of
Cash from operation ### ###
debentures
Sales of assets ### Repayment of loans ###
Issue of debentures ### Payment of dividends ###
Raising of loans ### Pay of tax ###
Collection from
### Cash lost in debentures ###
debentures
Refund of tax ### Closing cash balance ###

Cash from operation can be calculated by using following two method :

Cash Sales

Cash sales - (Purchases in cash + Cash operation Expenses)

Net Profit

It also prepared as statement form or by Adjusted Profit and Loss Account.