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Management acct cash flow

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Management Accounting - Cash Flow
It is very important for a business to keep adequate cash in hand to meet day-to-day
expenditures and to invest as and when required in business. Thus, cash plays a very vital role
to run a business successfully. Sometimes it has been observed that in spite of adequate profit
in business, they are unable to meet their taxes and dividends, just because of shortage of cash
flow.
We have read about two very important financial statements: first, revenue statement and
second, balance sheet. Revenue statements provide provide essential information about the
operating activities of a concern, and balance sheets show the financial position of a firm. But,
both are unable to convey anything about the generation of cash out of all business activities.
Keeping in view the above limitation, the financial accounting board, U.S.A., has emphasized on
the need for a cash flow statement as:
“Financial reporting should provide information to help potential investors and creditors and
other users in assessing the amounts, timing and uncertainty of prospective cash receipts from
dividends or interest and proceeds from the sales, redemption or maturity of securities or loans.
The prospects for those cash receipts of effected by an enterprises ability to generate enough
cash to meet the obligation when due and its others operating needs to re-invest in operations
and to pay cash dividends.”
In June 1995, the Securities and Exchange Board of India “SEBI” amended Clause 32 of the
listing agreement requiring every listed companies to give along with the balance sheet and
profit & loss account, a cash flow statement prepared in the prescribed format, showing cash
flows from operating activities, investing activities and financing activities, separately.
Recognizing the importance of cash flow statement, The Institute of Chartered Accountants of
India (ICAI) issued AS-3 revised Cash flow statements in March 1997. The revised accounting
standards supersede AS-3 changes in financial position, issued in June 1981. The objectives of
cash flow statement given in AS-3 (Revised) are as under:
“Information about the cash flows of an enterprise is useful in providing users of financial
statements with a basis to assess the ability of the enterprises to generate cash and cash
equivalents and the needs of the enterprises to utilize those cash flows. The economic
decisions that are taken by users require an evaluation of the ability of an enterprise to generate
cash and cash equivalents and the timing and certainty of their generations. The statement
deals with the provision of information about the historical changes in cash and cash
equivalents of an enterprise by mean of cash flow the statement which classified cash flow
during the period from operating, investing and financing activities.

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During a specified period of time, a cash flow statement describes the inflows and outflows of
the cash and cash equivalents in an enterprise. A cash flow statement shows the net effect of
various business transactions on cash and cash equivalents and consideration of receipts and
payments of cash. Cash flow is a summary of change in cash position in between the dates of
two balance sheets and revenue statements. The important terms used in a cash flow statement
are as follows:
Cash
The meaning of cash is cash in hand and cash at bank including deposits.
Cash and Cash Equivalents
Here, cash and cash equivalents imply readily convertible, highly liquid investments, the value
of which in cash is well-known to us without risk of change in its realization amount. The
purpose of keeping cash equivalents is to meet our current and short-term commitment rather
than for investments. Only those investments having short maturity terms qualify as cash
equivalents. Short maturity means maturity within three months.
Cash Flows
There are two types of flows: inflows and outflows. If the increase in cash is the effect of
transactions, it is called inflows of cash; and if the result of transactions is decrease in cash, it is
called outflows of cash.
Note: If decrease in cash is due to cash management rather than its operating, investing, and
financing activities, it will be excluded from cash outflows. Cash management means investment
of cash in cash equivalents.
Classification of Cash Flows
According to AS-3 (Revised), cash flows should be classified in three main categories:
Cash Flow from operating activities
Cash Flow from investing activities
Cash Flow from financing activities
Cash flow from operating activities
Inflow of cash from operating activities represents the level of sufficient cash generation
necessary to maintain operating capability without recourse to external resource of financing.
In other words, operating activities mean principal revenue-producing activities of a firm. It
represents the transactions those determine the profit or loss of a firm.

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Management Accounting - Cash Flow It is very important for a business to keep adequate cash in hand to meet day-to-day expenditures and to invest as and when required in business. Thus, cash plays a very vital role to run a business successfully. Sometimes it has been observed that in spite of adequate profit in business, they are unable to meet their taxes and dividends, just because of shortage of cash flow. We have read about two very important financial statements: first, revenue statement and second, balance sheet. Revenue statements provide provide essential information about the operating activities of a concern, and balance sheets show the financial position of a firm. But, both are unable to convey anything about the generation of cash out of all business activities. Keeping in view the above limitation, the financial accounting board, U.S.A., has emphasized on the need for a cash flow statement as: “Financial reporting should provide information to help potential investors and creditors and other users in assessing the amounts, timing and uncertainty of prospective cash receipts from dividends or interest and proceeds from the sales, redemption or maturity of securities or loans. The prospects for those cash receipts of effected by an enterprises ability to generate enough cash to meet the obligation when due and its others operating needs to re-invest in operations and to pay cash dividends.” In June 1995, the Securities and Exchange Board of India “SEBI” a ...
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