Financial Accounting for Business Management 9 Statement of Cash Flows Objectives 1. Appreciate the need for the cash flow statement a) How does cash differ from profit? b) What does the Cash Flow Statement tell us that the Income Statement and Statement of Financial Position do not? c) Why is cash important? 2. Understand the format of the cash flow statement 3. Be able to prepare a cash flow statement 4. Be able to interpret a cash flow statement 1. Needs for a Cash Flow Statement a) How Does Cash Differ From Profit? · For a business, it involves receipts and payments of cash or through its bank account during its accounting period · Cash / Bank Transactions o Purchase a fixed asset and paid by cash or cheque o Purchase of stock in cash or by cheque o Receipts from debtors in cash or by cheque o Payment by cash or cheque to creditors o Payment of dividends o Proceeds from issue of shares o Proceeds in cash from issue of debt o Sale of stock for cash o Receipts in cash/cheque from disposal of a fixed asset . Non Cash Transactions o Depreciation of fixed assets. o Sales/ Purchases on Credit o Profit or Loss on Disposal of fixed assets b) Income Statement and Balance Sheet Relation · The income statement provides information about a business performance, i.e. it shows profitability over an accounting period · The Statement of Financial Position provides information on the business financial position, i.e. assets, liabilities and capital · While these two statements provide users with a great deal of information, note that profitability does not necessarily equal cash and that strength of assets does not necessarily mean a large cash/bank balance What Cash Flow Shows · The statement of cash flows links profit with changes in assets and liabilities, and the effect on the cash of the business over a period of time · The statement concentrates on the sources and uses of cash and are a useful indicator of a company's liquidity and solvency . Hence, a statement of cash flow uses information from the accounting records including the income statement and statements of financial position, to show an overall view of money flowing in and out of the business during an accounting period
c) Benefits of Cash Flow · Survival in business depends on ability to generate cash o Provide management with useful information on the timing of cash requirements for the business o Payables are more interested in the ability to be paid o Provides users with information on the business ability to maintain a good credit control · Unlike profit, cash cannot be manipulated o A better basis for comparison · Cash - comprise cash on hand and on demand deposits · Cash Equivalents - short term highly liquid investments that can easily be converted into cash o Note that bank overdrafts are payable on demand and are included as a part of cash and cash equivalents 2.