Page 167 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes 8.1 Meaning of Cash Flow Statement

The cash flow statement is being prepared on the basis of an 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.
The following are the main motives of preparing the cash flow 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.

8.2 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 firm.
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 flows.
(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 an
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.

Notes 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 Considers in general i.e. current assets; the
to cash resource; which fosters only for very duration of the liquidity of the current assets
short span of planning are longer in gestation than the liquid assets;
which paves way for long span of planning
Opening and closing balances of cash Increase or decrease of working capital is
resources are considered for the preparation considered but not the opening and closing
balance for preparation
Contd...
The flow in the statement means real cash The flow in the statement need not be real cash
flow flow

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