Page 232 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Unit 13: Cash Flow Analysis (As Per AS-3)

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

Table 13.1: Cash Flow Statement vs Fund Flow Statement

Cash Flow Statement Fund Flow Statement
Cash inflow and outflow are only considered Increase or decrease in the working capital is registered
Causes & changes of cash position Causes & changes of working capital position
Considers only most liquid assets pertaining to cash Considers in general i.e. current assets; the duration of the
resource; which fosters only for very short span of liquidity of the current assets are longer in gestation than
planning the liquid assets; which paves way for long span of
planning
Opening and closing balances of cash resources are Increase or decrease of working capital is considered but
considered for the preparation not the opening and closing balance for preparation
The flow in the statement means real cash flow The flow in the statement need not be real cash flow

Self Assessment

Fill in the blanks:

1. The cash flow statement is being prepared on the basis of extracted information of
...................... of the enterprise.

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