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Management acct cash flow

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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