CASH-FLOW ANALYSIS

Cash Flow Statement

Meaning of Cash Flow Statement

A Cash Flow Statement is one which is prepared from income

statement and balance sheet, showing sources of cash and uses of cash.
It reveals the inflow and outflow of cash during a particular period, and
explains reasons for changes in cash position between two balance sheet
dates.
Importance or uses of Cash Flow
Statement
It indicates the reasons for low cash balance despite huge profits or huge cash balance in
spite of low profits.
By comparing the actual cash flow statement with that of the projected one, it helps
management in identifying the variation, and thus provide a basis for remedial measures.
It reveals the liquidity position of the firm, by indicating the source of cash and its uses.
Provides a basis for effective cash management by matching cash receipts and payments.
It is an essential tool for short term planning.
It helps in taking loans from banks by indicating the repayment capacity of the firm
through cash flow statement.
A projected cash flow statement aids in planning for the investment of surplus or meeting
the deficit.
It explains the reasons for changes in cash position between two balance sheet dates.
Distinction between Cash Flow and Fund
Flow Statements
Difference between Cash Flow Statement and Receipts and
Payment Account
Limitations of Cash Flow Statement
There is a lack of clarity in the precise definition of cash.
Controversies exist over inclusion of items like cheques, stamps,
postal orders, demand drafts, etc., in cash.
Since near cash items are excluded from cash flow statement, it does
not reveal the true liquidity position of the firm.
Further, cash flow statements exclude non-cash items of expenses and
incomes [example, depreciation and writing back of provision],
therefore, they cannot provide a comprehensive picture of a firms
financial position.
A fund flow statement, based on a under concept of funds, ie., working
capital, presents a more complete picture than cash flow statement.
 Steps for preparing Cash Flow Statement
1) Compute Cash Trading Profit by adding non cash and non-operating incomes
from Net Profit [i.e. Current year profit Previous year profit].
2) Calculate Cash from Operations by adding decrease in current assets and increase
in current liabilities and deducting increase in current assets and decrease in current
liabilities.
The above two step can be done in the form of a statement.
3) If required, prepare non-current assets and non-current liabilities accounts,
considering additional information. If any, given regarding such accounts. This is
done to find out cash receipts and cash payments.

4) Prepare a cash flow statement by incorporating the data generated in the above
three steps. Such cash flow statement can be prepared either in (a) Accounts form
Balance sheets of a firm is given below (Values in Rs)