Page 132 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT

Unit 9: Financial Considerations

An important concept in understanding the income statement is Earnings Per Share (EPS). The Notes
EPS for a company is net income divided by the number of shares of common stock outstanding.
It represents the bottom line for a company.
Companies continually make decisions on how their bottom line will be impacted since
shareholders in the company are concerned with how management decisions affect individual
shareholder position.

9.1.3 Cash Flow Statement

Cash Flow Analysis is useful for short-run planning. A historical analysis of cash flows provides
insight to prepare reliable cash flow projections for the immediate future & make suitable
arrangements. Cash Flow statement shows inflow – sources of cash (i.e. positive cash flow) and
outflow - uses of cash (i.e. negative cash flows) during the period and the difference being ‘Net
Cash Flow’. This statement analyses changes in non-current accounts as well as current accounts
(other than cash) to determine the flow of cash.

Task Suppose you are the accountant of XYZ firm dealing in furniture
manufacturing and sale. Draw a fictitious cash flow statement and income
statement for your company. (Write the contents only, no need to write the
figures).

Statement of changes in cash position is prepared recording only inflows and outflows of cash,
reflecting the net change during the period. Cash received minus cash paid during a period is the
cash balance at the end of the period. If the net change in cash position has to be found out from
the profit and loss account, comparative balance sheets, adjustments for the non-cash items
should be made.

Types of Cash Flow

The flow or movement of cash may be of two types, namely, actual flow of cash and notional
flow of cash.

Actual Flow of Cash

There may be actual or direct flow of cash ‘in’ and ‘out’ of the business under the following
circumstances:
a. Actual inflow of Cash: This transaction results in the actual inflow of cash into the business.
Similarly, there is inflow of cash when debentures are issued for cash, loans raised in cash,
sale of fixed assets for cash, dividends received in cash, etc.

Example: Issue of shares for cash:
Cash a/c Dr
To Share Capital a/c

b. Actual outflow of Cash: This transaction results in the actual outflow of cash from the
business. Similarly, there is outflow of cash on repayment of loans, redemption of
preference shares or debentures, payment of taxes, dividend, etc. in cash.

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