Meaning of Cash Flow Statement - Management Duniya

Meaning of Cash Flow Statement

Cash flow is made up of two words i.e. Cash and Flow, whereas Cash means cash balance in hand including cash at bank balance, and Flow means changes (which may be + or – increase or decrease) in the cash movements of the business.

Cash Flow Statement deals with only such items, which are connected with cash i.e., items relating to inflow and outflow of cash. In other words, it is prepared to study the changes in cash, or to show impact of various transactions on the cash. In short, it is a statement, which is prepared to show the flow of cash in the business during a particular period. It thus, tells about the changes in cash position of a business. The changes may be related either with the cash receipts or cash payments or disbursements of cash. Thus, Cash Flow Statement is a summary of cash receipts and payments whereby reconciling the opening cash balance with the closing cash including bank balances in done. It also explains the reasons for the changes in the cash position of the business on account of the Decrease in the cash position is termed as outflow of cash and increase is termed in flow. Cash flow statement also tells about various sources in cash such as cash from operations, sale of current and fixed Assets, issue of shares/debentures, also termed as inflow of cash whereas loss from operations, purchase of current and fixed assets, redemption of preference shares/debentures and other long term loans etc are also termed as outflow of cash.

The Cash Flow Statement is prepared because of number of merits, which are offered by it. Such merits are also termed as its objectives. The important objectives are as follows :

To Help the Management in Making Future Financial Policies – Cash Flow statement is very helpful to the management. The management can make its future financial policies and is in a position to know about surplus or deficit of cash. Accordingly, management can think of investing surplus funds, if nay, in either short term or long term investments. Thus, cash is the center of all financial decisions.

Helpful in Declaring Dividends etc. – Cash Flow Statement is very helpful in declaring dividends etc. This statement can supply information regarding to understand the liquidity. It must be paid within 42 da­ys.

 Cash Flow Statement is Different than Cash Budget :- Cash budget is prepared with the help of inflow and outflow of cash. If there is any variation, the same can be corrected.

Helpful in devising the cash requirement :-  Cash flow statement is helpful in devising the cash requirement for repayment of liabilities and replacement of fixed assets

Helpful in finding reasons for the difference -  Cash Flow Statement is also helpful in finding reasons for the difference between profits/losses earned during the period and the availability of cash whether cash is in surplus or deficit.

 As per AS-3, Cash Flow Statement :-  Cash Flow Statement is prepared  with a view to highlight the cash generated from recurring activities or cash loss if any where as net profit is calculated after making adjustments on account of non cash items in the profit and loss account.

Helpful in predicting sickness of the business:- Cash flow is helpful in predicting sickness of the business with the help of different ratios.

Tags: Budget, Cash, Cash Flow, Cash flow Statement, Dividends, inflow, Statement
By: Management Duniya