Cash flow statement is known as a statement that shows inflows (receipts) and outflows (payments) of cash during a specific time period.
It helps in analyzing the reasons that are required for changes in cash balance between the two balance sheets and therefore can help students who need assignment help with balance sheets.
The term ‘cash’ here refers to the cash and cash equivalents. Only the items that affects cash are included in cash flow statement. The students who require accounting assignment help, must keep in mind the following points about cash flow statement.
Importance of cash flow statement: –
- Useful for Short-term Financial Planning:
A cash flow statement provides us the information of planning the short-term financial needs of the firm. Since it provides the information about the sources and utilization of cash during a specific period,
it makes it simple for the management to assess whether it will have enough cash to pay the creditors in time and to meet the day-to-day expenses,
or whether it will have adequate cash to pay the long-term loans and interest and whether it has enough cash to make the payment of purchase of fixed assets or not.
- Useful in preparing the Cash Budget:
A cash flow statement helps to prepare a cash flow budget which was prepared for future period. It gives the information to the management regarding the deficit periods of cash or surplus, that is,
which months will have excess of payment over receipts and in which month the receipts of cash will exceed the payments. In advance, it helps in planning the short-term credit for deficit periods.
Also, it helps in planning the investment of surplus cash in short term investments.
- Comparison with the Cash Budget:
A cash flow statement is prepared at the end of the year whereas the preparation of cash budget is started at the beginning of the year.
Comparison between the two helps us to find out the limit to which the firm’s financial resources are generated and are used according to the plan.
- Study of the trend of cash receipts and payments:
A cash flow statement reveals the speed limit at which the cash can be generated from inventory, trade receivables and other current assets and also measures the speed at which the current liabilities can be paid.
- It Explains the Deviation of Cash from Earnings:
A firm suffering a loss might have plenty of cash and also a firm which earns a huge profit might have a paucity of cash. Cash flow statement has its own reasons.
- Helpful in Ascertaining of Cash flow from various activities separately:
A cash flow statement sets its aim in order to highlight the Cash flow from Operating Activities, Investing and Financing Activities in a separate way. It tells us about the total cash that has been used or generated in these activities.
- Helpful in making Dividend Decisions:
A separate ‘Dividend Bank a/c’ should be made in order to deposit the amount of dividend within five days of declaration of such dividend.
Thus, in this case, a cash flow statement helps the management in ascertaining the position of the cash that is generated from operating activities through which the dividend can be paid.
- Test for the managerial decisions:
According to the general rule, fixed assets must be purchased from the funds that are raised from long-term sources
such as long-term loans, issue of shares, debentures, etc. and which are to be wiped out of the cash that is generated from operating activities.
- Useful to outsiders:
Cash flow statement gives help to the debentureholders, lenders, investors, bankers, suppliers of credit, etc. to analyze the financial position of the enterprise and the proper decisions can be taken on such analysis.
One must not forget to study limitations at the time of taking accounting assignment help.
Limitations of Cash Flow Statement: –
- Not suitable for judging the liquidity:
The true picture of the liquidity of the firm is not shown by it as the liquidity is not just dependent upon the cash. It also has its dependance on those assets that can be easily converted into cash.
Exclusion of these assets can block the actual report of the firm’s ability to meet its liabilities when they become due to be paid.
- Possibility of Window-Dressing:
The working capital position of a firm has lower possibility of window-dressing as compared to the cash position. Before the Balance Sheet date, the maneuvering of the cash balance
becomes simple by postponing the purchases and other payments and also by rapidly collecting the cash from debtors.
- It ignores non-cash transactions:
Cash flow statement ignores non-cash transactions like conversion of debentures into shares, purchase of fixed assets by issuing shares or debentures, issue of bonus shares.
Hence, the cash flow statement will not be in a position to judge the exact position of the enterprise.
- It ignores the accrual concept of accounting:
Accrual concept, which is said to be one of the basic concepts of accounting, is ignored by it since it is prepared on cash basis.
- No substitute for an Income Statement:
Cash flow Statement does not substitute the Income Statement that takes into consideration both non-cash items and cash items. Thus, net cash flow cannot be said as net income of the business.
- Historical in nature:
The past years statements, helps in preparation of a cash flow statement. Thus, all the informations that are shown by it are of historical nature.
If the projected cash flow statement accompanies a cash flow statement, then the information revealed by it will be more useful.
Hence, a cash flow statement reflects the details of change (increase/decrease) of the cash equivalents and cash in operating, investing and financing activities.
In the special treatments, it also shows the net change in the cash and cash equivalents. Hence, these were a few points that would assist students who require assignment help