Advantage and Disadvantage of Cash Flow Statement

Topics: Cash flow statement, Balance sheet, Financial statements Pages: 5 (1537 words) Published: September 7, 2013
Difference Advantage Disadvantage and Uses of Cash Flow Statement & Funds Flow Statement There are 3 basic financial statements that exist in the area of Financial Management. 1. Balance Sheet.
2. Income Statement.
3. Cash Flow Statement.
 The first two statements measure one aspect of performance of the business over a period of time. Cash flow statements signify the changes in the cash and cash equivalents of the business due to the business operations in one time period. Funds flow statements report changes in a business's working capital from its operations in a single time period, but have largely been superseded by cash flow statements. A Cash Flow statement is a statement showing changes in cash position of the firm from one period to another. It explains the inflows (receipts) and outflows (disbursements) of cash over a period of time. The inflows of cash may occur from sale of goods, sale of assets, receipts from debtors, interest, dividend, rent, issue of new shares and debentures, raising of loans, short-term borrowing, etc. The cash outflows may occur on account of purchase of goods, purchase of assets, payment of loans loss on operations, payment of tax and dividend, etc. A cash flow statement is different from a cash budget. A cash flow statement shows the cash inflows and outflows which have already taken place during a past time period. On the other hand a cash budget shows cash inflows and outflows which are expected to take place during a future time period. In other words, a cash budget is a projected cash flow statement. Funds Flow statements states the changes in the working capital of the business in relation to the operations in one time period. For example, if the inventory of the business increased from Rs 1, 40,000 to Rs 1, 60,000, then this increase of Rs 20,000 is the increase in the working capital for the corresponding period and will be mentioned on the funds flow statement. Net working capital is the total change in the business's working capital, calculated as total change in current assets minus total change in current liabilities. Cash flow statements have largely superseded funds flow statements as measurements of a business's liquidity because cash and cash equivalents are more liquid than all other current assets included in working capital's calculation. What is Included in a Cash Flow Statement?

The statement of cash flows uses information from the other two statements (Income Statement and Balance Sheet) to indicate cash inflows and outflows.  A Cash Flow Statement comprises information on following 3 activities: 1.      Operating Activities

2.      Investing Activities
3.      Financing Activities
1.      Operating Activities
Operating activities include cash flows from all standard business operations. Cash receipts from selling goods and services represent the inflows. The revenues from interest and dividends are also included here. The operational expenditures are considered as outflows for this section. Although interest expenses fall under this section but the dividends are not included .Dividends are considered as a part of financing activity in financial accounting terms. 2.      Investing Activities

Investing activities include transactions with assets, marketable securities and credit instruments. The sale of property, plant and equipment or marketable securities is a cash inflow. Purchasing property, plant and equipment or marketable securities are considered as cash outflows. Loans made to borrowers for long-term use is another cash outflow. Collections from these loans, however, are cash inflows. 3.      Financing Activities

Financing activities on the statement of cash flows are much more defined in nature. The receipts come from borrowing money or issuing stock. The outflows occur when a company repays loans, purchases treasury stock or pays dividends to stockholders. As the case with other activities on the statement of cash flows  depend on activities...
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