Page 108 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 6: Cash Flow Statement

cash resources of the firm. The meaningful analysis is only possible through cash fl ow statement Notes

analysis which facilitates the firm to identify the possible sources of cash as well as the expenses
and expenditures of the fi rm.
6.1 Meaning of Cash Flow Statement

The cash flow statement is being prepared on the basis of extracted information of historical

records of the enterprise. Cash flow statements can be prepared for a year, for six months, for

quarterly and even for monthly. The cash includes not only means that cash in hand but also
cash at bank.

Objectives of Cash Flow Statements

The following are the main motives of preparing the cash fl ow statement:
1. To identify the causes for the cash balance changes in between two different time periods,
with the help of corresponding two different balance sheets.

2. To enlist the factors of influence on the reduction of cash balance as well as to indicate the

reasons though the profit is earned during the year and vice versa.
Utility of Cash Flow Statement

1. To identify the reasons for the reduction or increase in the cash balances irrespective level

of the profits earned by the fi rm.
2. It facilitates the management to maintain an appropriate level of cash resources.
3. It guides the management to take futuristic decisions on the prospective demands and
supply of cash resources through projected cash fl ows.
(a) How much cash resources are required?
(b) How much cash requirements could be internally settled?
(c) How much cash resources are to be raised through external sources?

(d) Which types of instruments are going to be floated for raising the required
resources?
4. It helps the management to understand its capacity at the moment of borrowing for any
further capital budgeting decisions.

5. It paves way for scientific cash management for the firm through maintenance of appropriate
cash levels i.e. optimum level cash of resources.
6. It avoids in holding excessive or inadequate cash resources through proper planning of
cash resources.
7. It moots control through identification of variations occurred in the cash expenses and

expenditures.

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