Cash Flow Statement: Meaning, Importance, Objectives and Users

 

Concept of Cash Flow

Cash flow is the movement of money in or out of a business, project or financial product.

It is usually measured during a specified limited period of time.

It is also known as combination of cash inflows (receipt) and cash outflows (payment) during a certain time period.

Cash inflow refers to the amount of cash that you received from various sources.

Cash outflow refers to the amount of cash that you pay out for various expenditures.

The nature of cash flow can be classified into single cash flow, multiple cash flows, perpetual cash flows etc.

 

Cash flow statement is somewhat similar to fund flow statement.

The fund flow statement is based on accrual. But cash flow statement is based on cash.

It reports only cash transaction. It provides information about inflow and outflow of cash.

 

Cash flow statement reports cash inflow and outflow during the specific accounting period.

It is classified into three activities.

They are operating activities, investing activities and financing activities.

There are two methods to prepare cash flow statement.

They are direct method and indirect method.

 

 

Cash flow statement is one of the important tools of financial analysis.

It is considered as primary statement.

It is published by the companies along with their financial statements.

In some countries the preparation cash flow statement is legal requirement.

In United Kingdom, since 1992 company accountants have been required to prepare a year- end cash flow statement in accordance with Financial Reporting Standards.

According to Nepal Accounting Standard, companies are responsible to publish cash flow statement along with their financial statements.

 

Definition of cash flow statement

According to Nepal Company Act 2063 BS, “ The company should prepare cash flow statement along with profit and loss account and balance sheet at the ending of the financial year.”

According to International Accounting Standard (IAS), 1992 AD; “Cash flow statement should be prepared along with balance sheet and profit and loss account instead of fund flow statement.”

According to S N Maheshwari, “A cash flow statement is a statement depicting change in cash position from one period to another”.

 

 

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Importance of Cash Flow Statement

The cash flow statement provides information regarding inflows and outflows of cash of a firm for a period of one year.

Therefore cash flow statement is important on the following grounds:

Cash basis

The cash flow statement is prepared on the basis of cash basis not on accrual basis.

Therefore, cash position of a company can be easily evaluated.

 

Sources and uses

Cash flow statement helps to identify the sources of cash inflow.

It also shows the various activities where in the cash was used (utilised, outflow).

 

Cash planning

Cash flow statement is significant to management for proper cash planning and maintaining a proper matching between cash inflows and outflows.

 

Cash inflow report

Cash flow statement reports the amount of cash received during the period through various financing activities, such as issue of shares, debentures and raising long-term loan.

 

Cash outflow report

Cash flow statement reports the amount of cash used during the period in various long-term investing activities such as purchase of fixed assets and investment.

 

External users

External users like creditors, bank, financial institutes etc provide loan after analyzing cash flow statement.

 

Internal users

Internal users like management of the company can plan and take decision from cash flow statement.

 

Repayment of loan

It helps to planning repayment of loan, replace the fixed assets and other long term financial planning

 

 

Objectives of Cash Flow Statement

The main objectives of cash flow statement are as following:

Classification of activities

All the activities are classified into operating activities, investing activities and financial activities which help a firm to analyze and interpret its various inflows and outflows of cash.

 

Measurement of cash

Inflows of cash and outflows of cash can be measured annually which arise from operating activities, investing activities and financial activities.

 

Generating inflow of cash

Timing and certainty of generating the inflow of cash can be known which directly helps the management to take financing decisions in future.

 

Prediction of future

A cash flow statement forecasts the future cash flows which helps the management to take various financing decisions.

 

Liquidity and solvency

Both the inflows and outflows of cash and cash equivalent can be known as liquidity and solvency.

The liquidity position of a firm can be known easily.

 

Cash planning

No doubt a cash flow statement helps the management to prepare its cash planning for the future and thereby avoid any unnecessary trouble.

It helps the management to ascertain cash planning.

 

Information to the users

Cash flow statement provides various information related to cash inflows and cash outflows to the users about different purposes.

 

Different Between Cash Flow and Fund Flow Statement

Bases	Cash Flow Statement	Fund Flow Statement
Basis	It is based on cash basis.	It is based on accrual basis.
Working capital	It does not need working capital to change in current assets and current liabilities.	It needs working capital to change working capital through current assets and current liabilities.
Useful	This statement is useful for short term analysis and cash planning.	This statement is more useful for long term analysis of financial planning.
Purpose	The main purpose of cash flow statement is to find out cash position between two balance sheets.	The main purpose of fund flow statement is to find out change position between two balance sheets.
Cash balance	Cash flow statement shows opening and closing balance of cash. It is also base of answer.	Fund flow statement does not show opening and closing balance of cash. It is shown in schedule change in working capital.

 

 

Users of Cash Flow Statement

Generally, there are two main users of cash flow.

They are inside users and outsider users.

The insider users are management and outsider users are creditors and investors.

Management

Managements take decision about new policy by analyzing the financial statements.

Managements can draw significant conclusion and determine.

Cash flow statement helps them in different ways for knowing the financial position, profitability and capital structure. They use financial statement:

To ascertain the trend of profit of business.

To plan profits for the future.

To forecast the sales, purchases and different expenses on the basis of past data.

To determine liquidity position of the business.

To compare the efficiency of different employees, different departments, different policies and procedures.

To collect the different information for various decision making.

 

Creditors

In order to know the fact and actual position of short term liquidity position, the creditors analyze the financial statement.

They are interested in knowing whether the concern will be able to pay their debts or not within time.

They can easily ascertain it by analyzing the financial statements.

 

Investors

They are founder investors of the company.

They are equity shareholders.

They want higher dividend on their investment.

Dividend is totally depending on profit.

More profit more dividends and vice versa.

  

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