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Cash Flow Statement

MEANING AND OBJECTIVES


Cash plays a very important role in the
economic life of a business.
A firm needs cash to make payment to its
suppliers, to incur day-to-day expenses and
to pay salaries, wages, interest and
dividends etc.
In fact, what blood is to a human body, cash
is to a business enterprise. Thus, it is very
essential for a business to maintain an
adequate balance of cash. For example, a
concern operates profitably but it does not
have sufficient cash balance to pay
dividends, what message does it convey to
the shareholders and public in general. Thus,
management of cash is very essential.
Cash means, cash in hand and demand
deposits with the bank.
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.
Cash flows are cash inflows and outflows
It is very useful in the evaluation of cash
position of a firm
CASH FLOW STATEMENT
The statement of cash flow shows three main
categories of cash inflows and cash outflows,
namely : operating, investing and financing
activities.
(a) Operating activities are the principal revenue
generating activities of the enterprise.
(b) Investing activities include the acquisition and
disposal of long-term assets and other
investments not included in cash equivalents.
(c) Financing activities are activities that result in
change in the size and composition of the owners
capital (including Preference share capital in the
case of a company) and borrowings of the
enterprise.
CASH FLOW STATEMENT
INDIRECT METHOD
INDIRECT METHOD
Plus or minus the change in working capital, as
follows:
An increase in current assets (excluding cash and cash
equivalents) would be shown as a negative figure
because cash was spent or converted into other current
assets, thereby reducing the cash balance.
A decrease in current assets would be shown as a
positive figure, because other current assets were
converted into cash.
An increase in current liabilities (excluding short-term
debt which would be reported in the financing activities
section) would be shown as a positive figure since more
liabilities mean that less cash was spent.
A decrease in current liabilities would be shown as a
negative figure, because cash was spent in order to
reduce liabilities.
Cash Flow Statement Example:
To illustrate a statement of cash flows we
will use the first year operations for Tax
Consultants Inc.
The company started on January 1, 2003,
when it issued 60,000 shares of $1 par
value common stock for $60,000 cash.
The company rented its office space and
furniture and equipment, and it performed
tax consulting services throughout the first
year.
The comparative balance sheets at the
beginning and at the end of the year 2003
appear as follows.
Balance sheet
Income Statement

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