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
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Basis of Difference | Funds Flow Statement | Cash Flow Statement |
| 1. | Basis of Analysis | Funds flow statement is based on broader concept i.e. working capital. | Cash flow statement is based on narrow concept i.e. cash, which is 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. |
| 3. | Usefulness | Funds flow statement is more useful in assessing the long-range financial strategy. | Cash flow statement is useful in understanding the short-term phenomena affecting the liquidity of the business. |
| 4. | Schedule of Changes in Working Capital | In funds flow statement changes in current assets and current liabilities are shown through the schedule of changes in working capital. | In cash flow statement changes in current assets and current liabilities are shown in the cash flow statement itself. |
| 5. | Causes | Funds flow statement shows the causes of changes in net working capital. | Cash flow statement shows the causes the changes in cash. |
| 6. | Principal of Accounting | Funds flow statement is consonant with the accrual basis of accounting. | In cash flow statement data obtained on accrual basis are converted into cash basis. |