Tag: Flow

  • Operating cash flow its type and importance

    Operating cash flow its type and importance

    Operating cash flow (OCF) is the cash a business generates through routine operating activities, such as service delivery, marketing, hiring, and payroll, over a specified period. OFC represents a company’s ability to make money in the short and long term. Focusing on operating cash flow metrics helps businesses understand whether they can continue to grow and expand their business. OCF is also important for assessing overall organizational performance and financial health.

    Here are the articles to explain, What is operating cash flow? type and importance

    For any business to generate income, it must maintain a positive operating cash flow daily as it is directly related to net income. Cash flow management software helps companies and accounting teams manage money coming in and going out. It can also forecast future cash flows using historical financial data as a reference point.

    Type of cash flow

    Cash flow measures how much money is moving in and out of a company. A business considers valuable when it can generate positive cash flow or have more inflows than outflows.

    • Operating Cash Flow: Cash collected from regular business operations, including sales of goods, rent, wages, overhead, etc.
    • Investing cash flows: The funds used to purchase capital assets and securities such as stocks, bonds, and related holdings are investing cash flows. Cash flow into the company comes primarily from interest and dividends paid on these holdings.
    • Financing cash flows: Cash generated from the capital, external investments, and loans are financing cash flows. It also includes amounts recovered from debt and equity and additional corporate payments.
    • Free Cash Flow (FCF): The money left over after a business pays its operating expenses (such as salaries and taxes) is called free cash flow. Companies can spend their FCF however they want. Operating free cash flow often provides great insight for investors when reviewing business plans and making investment decisions based on the company’s financial efficiency.

    The importance of operating cash flow

    OCF is a major component of any financial analysis as it demonstrates the sustainability and financial stability of a business. Since operating cash flow takes into account day-to-day activities, it is necessary to determine whether current transactions are profitable.

    OCF is an integral part of a company’s earnings assessment. It focuses on cash items that can help determine whether a business will need outside funding or investment shortly.

    If an organization generates significant operating cash flow but reports a lower net income value, this implies an increase in the number of fixed assets and accelerated depreciation throughout the transaction.

    Operating cash flow is important for the following stakeholders to make sound business decisions:

    • Financial Analysts: OCF is interested in analysts because it indicates whether a company is financially stable and profitable.
    • Investors: OCF helps investors decide whether a business is worth their capital and offers them a good return on their investment.
    • Lenders: Financial institutions such as banks, loan unions, and credit unions evaluate OCF values ​​to determine an organization’s creditworthiness and financial responsibility for lending.

    How to Present Operating Cash Flow

    They are usually the first part of the financial statements, reported under the statement of cash flows, and include investing and financing cash flows. There are two ways of describing operating cash flow.

    Indirect method:

    The indirect method first adjusts net income at the bottom of the income statement to the cash basis. Net income needs to adjust because most businesses report on an accrual basis, which means there are small financial gains over time.

    Non-cash items such as depreciation, amortization, accounts receivable (AR) and accounts payable (AP) add to arrive at the cash figure. When a company raises an AR increase, revenue generates but cash has not yet been received. In this case, the AR value must subtract from net income to understand the true cash impact on the business.

    Likewise, an increase in AP indicates that expenses incurred have not been repaid. This results in the AP amount being added to net income to determine the actual cash impact.

    Direct Method:

    The direct method expresses operating cash flow and starts by recording cash-based transactions and tracking them during the accounting period.

    When using the direct method to display the OCF value, the company still needs to separately perform the indirect method of operating cash flow to reconcile funds to obtain absolute cash figures.

    Items included when presenting OCF by the direct method:

    • employee salary
    • Vendors and Vendor Payments
    • cash collected from customers
    • Interest Income and Dividends
    • Income tax and related interest payments

    How to Calculate Operating Cash Flow

    Reading cash flow and income statements can be challenging without knowing how to calculate the different metrics. Financial analysts can measure how a business conducts cash-based transactions by calculating operating cash flow.

    While the simplest form of calculating OCF is Gross Revenue Operating Expenses, the formula may vary from business to business. Every organization has different non-cash items, changes in assets, and financial liabilities. Regardless of how OCF calculates, all items on the income statement and balance sheet must consider.

    Calculate the change in operating cash flow:

    • OCF = Net Income + Non-Cash Expenses – Increased Working Capital
    • OCF = Net Income + Depreciation + Stock-Based Compensation + Deferred Taxes + Other Non-Cash Items – Increased AR – Increased Inventory + Increased AP + Increased Accruals + Increased Deferred Revenue
    • The operating cash flow ratio is a measure of whether a company can use the cash it generates to pay its current liabilities. It helps in assessing the short-term liquidity of a business with a transparent view of the company’s total revenue.

    OCF Ratio = Operating Cash Flow / Current Liabilities

    Operating Cash Flow Example

    Let us take a simple example to better understand cash flow from operations. A small business collects $50,000 in cash from its customers. It spent $2,500 on marketing, skills training, and advertising. Assume its current office space depreciates by $1,000 in the same fiscal year, while taxes are $12,500.

    Net income = $50,000 – $2,500 – $1,000 – $12,500

    Net Income = $34,000

    OCF = Net Income + Depreciation

    OCF = $34,000 + $1,000

    So OCF – $35,000.

    Operating cash flow vs. net income vs. cash earnings per share

    • Several financial indicators help assess the economic performance of a business. But two common metrics that stand often confused with OCF are net income and cash earnings per share (cash earnings per share).
    • Operating cash flow takes into account the amount of cash generated from normal business activities. It is part of the cash flow statement and calculates on an accrual basis.
    • Net income is gross income from sales, including investments and excluding expenses. The main difference between OCF and net income is the way a company recognizes revenue over a certain period and matches expenses to that revenue.
    • Both OCF and net income may be higher or lower depending on the type of financial principle and when it measures.
    • Cash earnings per share is a measure of cash flow based on the number of shares outstanding. Cash EPS indicates operational stability and helps to compare business and financial trends in the market.
    What is operating cash flow type and importance Image
    What is operating cash flow? type and importance; Photo by Tima Miroshnichenko from Pexels.
  • Explanation of Statement of Cash Flows with Objectives

    Explanation of Statement of Cash Flows with Objectives

    What does the Statement of Cash Flows mean? In accounting, a statement of cash flows, also known as the cash flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Explanation of Statement of Cash Flows with Objectives. The statement of cash flows is one of three very important financial reports. That managers and investors look at when analyzing a company’s past or present financial status.

    Know and Understand the Concept of the Statement of Cash Flows.

    The balance sheet and the income statement are the other two reports. All of these reports are very important in running a successful business. But the statement of cash flows is the most important. It is like the blood of a company since it would not survive successfully without it. Cash on hand can be much more important. Than income, profits, assets, and liabilities put together, especially in the early stages of any company.

    Introduction:

    The statement of cash flows tells us how much cash we have on hand after all costs are met. It shows how much cash we started with and how much we pay out. There are two parts to the statement of cash flows which are the top and bottom halves. The top half deals with the inflow and outflow of the company’s cash.

    The bottom half of the statement reports where the funds end up. Just like the balance sheet, the top and bottom halves of a cash flow statement match. Knowing just how important it is to have cash on hand to pay the bills we want to make sure and review cash flow statement regularly.

    Cash flow is a little more honest than an income statement because the cash flow statement shows money coming in only when we deposit it and money going out only when we physically write out a check. Because the statement of cash flows reflects the actual receipt of cash, no matter where it comes from, the entries are a bit different from the revenue shown in a company’s income statement.

    These funds are usually made up of gross receipts on sales, dividend and interest income, and invested capital. Gross receipts on sales represent the total money that we take in on sales during the period. Gross receipts are based on our gross revenue, of course, but they also take into account when you receive payment. Dividend and interest income is the income that we receive from savings accounts and other securities.

    Meaning:

    The statement of cash flows is one of the financial statements issued by business and describes the cash flows into and out of the organization. Its particular focus is on the types of activities that create and use cash, which are operations, investments, and financing. Though the statement of cash flows is generally considered less critical than the income statement and balance sheet, it can use to discern trends in business performance that are not readily apparent in the rest of the financial statements.

    This is one of those amounts that are also reporting on the income statement and should be the same as long as we receive the money during the period covered by the cash flow statement. Invested capital is part of the owner’s equity in the balance sheet. Although it does not represent revenue from our business operations and would not be part of the income statement, it can be a source of cash for our company.

    Extra Knowledge:

    The statement of cash flows keeps track of the costs and expenses that incur for anything and everything. Some of the expenses appear in the income statement and some don’t because they don’t directly relate to our costs of doing business. These funds consist of the cost of goods produced, sales, administration, interest expense, taxes, etc. The cost of goods produced is exactly that, the cost incurred to produce our product or service during the period. Sales expenses are the same expenses that appear in an income statement except that paying off bills or postponing payments may change the amounts. On to the bottom half of the statement of cash flows which shows where the money is ending up.

    When the company’s cash reserves raise the money flows into one or more of asset accounts. The bottom half of the cash flow statement keeps track of what is happening to those accounts. This part of the statement consists of changes in liquid assets and net change in cash position. With cash flowing in and out of the company, liquid assets are going to change during the period covered by the cash flow statement. The items listed in this portion of the cash flow statement are the same ones that appear in the balance sheet. Raising the level of our liquid asset accounts has the effect of strengthening the cash position.

    Explanation of Statement of Cash Flows with Objectives
    Explanation of Statement of Cash Flows with Objectives, #Pixabay.

    Cash flow analysis:

    To properly construct a cash flow analysis, we have to look at three very important activities which are operating, investing and financing.

    • Operating activities are the cash components that are generating from the sales of the companies goods or products affecting the core business operation. These include the purchase of raw materials, production costs, advertising cost and even the delivery to customers.
    • Investing activities are straight forward items that report adjustments in the balances of fixed asset accounts like equipment, buildings, land, and vehicles. Investing activities include making and collecting loans and acquiring and disposing of investments and property, plant and equipment.
    • Financing activities are cash adjustments to fixed liabilities and owners’ equity. Cash increases when the company takes up a loan or raised capital when dividends are paid out, cash decreases accordingly. Financing activities involve liabilities and owner’s equity items. They include obtaining resources from owners and providing them with a return on their investments and borrowing money from creditors to repay the amounts borrowed.

    #Objectives of the statement of cash flows:

    There are a few main objectives of the statement of cash flows one of which is to help assess the timing, amounts and the uncertainty of future cash flows. This is one of the quarterly financial reports that publicly traded companies are required to release to the public. Because public companies tend to use accrual accounting. The income statements they release each quarter may not necessarily reflect changes in their cash positions.

    The statement of cash flows is very important to businesses. Because it helps investors see where the company can benefit from better cash management. There are many profitable companies today that still fail at adequately managing their cash flow. So it is important to be able to see where the weaknesses are to correct them.

    Conclusion of Objectives:

    In conclusion, the objectives are to explain why the statement of cash flows is very important for companies and people. That want to invest in a certain company. It shows how well a company manages its cash in-comings and outgoings as well as showing how profitable a company might be or become.

    It is a very clear document to understand so that we don’t fall victim to making a profit while still going broke. It’s also helpful for the companies finance department. So that they can see where the company stands to get more potential investors. It’s a great resource to look at to recap a company’s financial standing that most people can understand.

    What does Financial Statements mean?

    A firm communicates to the users through financial statements and reports. The financial statements contain summarized information of the firm’s financial affairs, organized systematically. Preparation of the financial statements is the responsibility of top management. They should prepare very carefully and contain as much information as possible.

    Two basis financial statements prepared for external reporting to owners, investors, and creditors are:

    Balance sheet:

    The balance sheet contains information about the resources and obligations of a business entity and about. Its owner’s interests in the business at a particular point of time. In accounting’s terminology, balance sheet communicates. Information about assets, liabilities and owner’s equity for a business firm as on a specific date. It provides a snapshot of the financial position of the firm at the close of the firm’s accounting period.

    Profit and loss account:

    The profit and loss account presents the summary of revenues, expenses and net income (or net loss) of a firm for some time. Net income is the amount by which the revenues earned during a period exceed the expenses incurred during that period.

    More information requires planning and controlling and therefore the financial accounting information is presenting in different statements and reports in such a way as to serve the internal needs of management. Financial statements are preparing from the accounting records maintaining by the firm.

    The various objectives of financial statements are:

    • To provide reliable financial information about economic resources and obligations of a business enterprise.
    • To provide reliable information about changes in the resources of an enterprise that result from the profit-directed activities.
    • Also, financial information that assists in estimating the earning potential of the enterprise.
    • To provide other needed information about changes in economic resources and obligations.
    • To disclose, to the extent possible, other information related to the financial statement that is relevant to statement users.
  • What does Cash Flow Statements mean? Introduction, Meaning, and Definition

    What does Cash Flow Statements mean? Introduction, Meaning, and Definition

    Cash Flow Statements; In financial accounting, a cash flow statement, also known as the statement of cash flows, is a financial statement. That shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. What does Cash Flow Statements mean? Introduction, Meaning, and Definition; Essentially, the cash flow statement concerns with the flow of cash in and out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet.

    Know and Understand the concept of Cash Flow Statements with their Introduction, Meaning, and Definition.

    The cash flow statement was previously known as the flow of funds statement. The cash flow statement reflects a firm’s liquidity. The balance sheet is a snapshot of a firm’s financial resources and obligations at a single point in time. And, the income statement summarizes a firm’s financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues.

    The cash flow statement includes only inflows and outflows of cash and cash equivalents. It excludes transactions that do not directly affect cash receipts and payments. These noncash transactions include depreciation or write-offs on bad debts or credit losses to name a few. The cash flow statement is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Noncash activities are usually reporting in footnotes. As well as know more; Cash Flow Statement: Explanation, Classification, and Objectives.

    #Introduction to Cash Flow Statements:

    Did you know? You can earn our Financial Statements Certificate of Achievement when you join PRO Plus. To help you master this topic and earn your certificate, you will also receive lifetime access to our premium financial statements materials. These include our video seminar, visual tutorial, flashcards, cheat sheet, quick tests, a quick test with coaching, business forms, and more. The official name for the cash flow statement is the statement of cash flows. The statement of cash flows is one of the main financial statements.

    #Meaning of Cash Flow Statements:

    Cash Flow Statement is a statement which describes the inflows (sources) and outflows (uses) of cash and cash equivalents in an enterprise during a specified period. Such a statement enumerates the net effects of various business transactions on cash. And, its equivalents and takes into account receipts and disbursements of cash.

    A cash flow statement summarizes the causes of changes in the cash position of a business enterprise between dates of two balance sheets. According to AS-3 (Revised), an enterprise should prepare a cash flow statement and should present it for each period for which financial statements are prepared.

    Extra Knowledge:

    The terms cash, cash equivalents, and cash flows are used in this statement with the following knowledge of meaning below are:

    • Cash comprises cash on hand and demand deposits with banks.
    • The cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
    • Cash equivalents are held to meet short-term cash commitments rather than for investment or other purposes.
    • For an investment to qualify as a cash equivalent. It must be readily convertible to a knows amount of cash and be subject to an insignificant risk of change in value. Therefore, an investment normally qualifies as a cash equivalent only. When it has a short-maturity, of say, three months or less from the date of acquisition.
    • Investments in shares are excluding from cash equivalents unless they are, in substance, cash equivalents. For example, preference shares of a company acquired shortly before their specified redemption date.
    • If the effect of the transaction increases cash and its equivalents. It calls an inflow (source) and if it results in the decrease of total cash, it knows as outflow (use) of cash.

    Cash flows exclude movements between items that constitute cash or cash equivalents. Because these components are part of the cash management of an enterprise rather than part of it’s operating, investing and financing activities. Cash management includes the investment of excess cash in cash equivalents.

    What does Cash Flow Statements mean Introduction Meaning and Definition
    What does Cash Flow Statements mean? Introduction, Meaning, and Definition, #Pixabay.

    #Definition of Cash Flow Statements:

    Cash flow statements a statement of changes in the financial position of a firm on a cash basis. It reveals the net effects of all business transactions of a firm during. A period on cash and explains the reasons for changes in cash position between two balance sheet dates.

    It shows the various sources (i.e., inflows) and applications (i.e., outflows) of cash during. A particular period and their net impact on the cash balance. The following definition of Cash flow statements as define by different-different authors below;

    According to Khan and Jain:

    “Cash Flow statements are statements of changes in financial position prepared on the basis of funds defined as cash or cash equivalents.”

    The Institute of Cost and Works Accountants of India defines Cash Flow statement as,

    “A statement setting out the flow of cash under distinct heads of sources of funds and their utilization to determine the requirements of cash during the given period and to prepare for its adequate provision.”

    Thus, a cash flow statement is a statement which provides a detailed explanation for the changes in a firm’s cash balance during a particular period by indicating. The firm’s sources and uses of cash and, ultimately, the net impact on cash balance during that period.

    Explanations:

    The cash flow statement intends to provide information on a firm’s liquidity and solvency. And, its ability to change cash flows in future circumstances provide. Additional information for evaluating changes in assets, liabilities, and equity improve the comparability of different firm’s operating performance by eliminating the effects of different accounting methods indicate the amount, timing and probability of future cash flows.

    The cash flow statement has been adopting a standard financial statement. Because it eliminates allocations, which might derive from different accounting methods. Such as various time-frames for depreciating fixed assets.

  • Cash Flow Statement: Explanation, Classification, and Objectives

    Cash Flow Statement: Explanation, Classification, and Objectives

    What does Cash Flow Statement mean? A cash flow statement counters the ambiguity regarding a company’s solvency that various accrual accounting measures create. We are studying Cash Flow Statement: Explanation, Classification, and Objectives; In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.

    Here explains the Concept of Cash Flow Statement with their Explanation, Classification, Objectives, and Limitations.

    The following concept is; Explanation of Cash Flow Statement, Classification of Cash Flow Statement, Objectives of Cash Flow Statement, and Limitations of the Cash Flow Statement. Meaning: A Cash Flow Statement is a statement which is prepared by acquiring Cash from different sources and the application of the same for different payments throughout the year. It is prepared from analysis of cash transactions, or it converts the financial transactions prepared under accrual basis to cash basis.

    The information about the number of resources provided by operating activities or net income after the adjustment of certain other charges can also obtain from it. The changes in Cash both at the beginning and at the end can also know with the help of this statement and that is why it is called Cash Flow Statement.

    #Explanation of Cash Flow Statement:

    A cash flow statement is an important indicator of financial health because a company can show profits while not having enough cash to sustain operations. It is a financial report that shows to the user the source of a company’s cash and how it was spent over a specific period. A cash flow statement counters the ambiguity regarding a company’s solvency that various accrual accounting measures create.

    It also categorizes the sources and uses of cash to provide the reader with an understanding of the amount of cash a company generates and uses in its operations. As opposed to the amount of cash provided by sources outside the company. Such as borrowed funds or funds from stockholders. They also tell the reader how much money was spent on items that do not appear on the income statement. Such as loan repayments, long-term asset purchases, and payment of cash dividends.

    The cash flow statement was previously known as the flow of funds statement. The cash flow statement reflects a firm’s liquidity. The balance sheet is a snapshot of a firm’s financial resources and obligations at a single point in time, and the income statement summarizes a firm’s financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues.

    Extra Knowledge:

    They include only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments. These non-cash transactions include depreciation or write-offs on bad debts or credit losses to name a few. It is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Non-cash activities are usually reported in footnotes.

    It is intended to provide information on a firm’s liquidity and solvency and its ability to change cash flows in future circumstances provide additional information for evaluating changes in assets, liabilities, and equity improve the comparability of different firms’ operating performance by eliminating the effects of different accounting methods indicate the amount, timing and probability of future cash flows. The cash flow statement has been adopting as a standard financial statement because it eliminates allocations, which might derive from different accounting methods, such as various time-frames for depreciating fixed assets.

    #Classification of Cash Flow Statement:

    The cash flow statement should report cash flows during the period classification by operating, investing and financing activities.

    Thus, cash flows are classifying into three main categories:

    1. Operating activities.
    2. Investing activities.
    3. Financing activities.

    Now, explain;

    Operating Activities:

    Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise, pay dividends, repay loans, and make new investments without recourse to external sources of financing.

    Information about the specific components of historical operating cash flows is useful, in conjunction with other information, in forecasting future operating cash flows. Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the enterprise. Therefore, they generally result from the transactions and other events that enter into the determination of net profit or loss.

    Explanations:

    Examples of cash flows from operating activities are:

    • A cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits.
    • Cash receipts from the sale of goods and the rendering of services.
    • Cash receipts from royalties, fees, commissions, and other revenue.
    • The cash payments to suppliers of goods and services.
    • Cash payments to and on behalf of employees.
    • Refunds or cash payments of income taxes unless they can specifically identify with financing and investing activities, and.
    • Cash receipts and payments relating to futures contracts, forward contracts, option contracts, and swap contracts when the contracts are heling for dealing or trading purposes.

    Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which includes in the determination of net profit or loss. However, the cash flows relating to such transactions are cash flows from investing activities.

    Investing Activities:

    Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been making for resources intended to generate future income and cash flows.

    Explanations:

    Examples of cash flows arising from investing activities are:

    • The cash payments to acquire fixed assets. These payments include those relating to capitalized research & development costs and self-constructed fixed assets.
    • Cash receipts from the disposal of shares, warrants, or debt instruments of other enterprises and interests in the joint venture.
    • Cash advances and loans made to third parties, other than advances and loans made by a financial enterprise.
    • The cash receipts from disposal of fixed assets.
    • Cash receipts from the repayment of advances and loans made to third parties, other than advances and loans of a financial enterprise.
    • Cash payments to acquire shares, warrants, or debt instruments of other enterprises and interests in joint ventures. Other than payments for those instruments considering to be cash equivalents and those held for dealing or trading purposes.
    • The cash payments for futures contracts, forward contracts, option contracts, and swap contracts except when the contracts are heling for dealing or trading purposes, or the payments are classifying as financing activities, and.
    • Cash receipts from futures contracts, forward contracts, option contracts, and swap contracts except when the contracts are heling for dealing or trading purposes or the receipts are classifying as financing activities.
    Financing Activities:

    Financing activities are activities that result in changes in the size and composition of the owner’s capital and borrowings of the enterprise. The separate disclosure of cash flows arising from financing activities is important because .it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise.

    Explanations:

    Examples of cash flows arising from financing activities are:

    • Cash proceeds from issuing shares or other similar instruments.
    • Cash proceeds from issuing debentures, loans, notes, bonds, and other short-or long-term borrowings, and.
    • The cash repayments of amounts borrowed such as redemption of debentures, bonds, preference shares.

    Cash Flow Statement Explanation Classification and Objectives
    Cash Flow Statement: Explanation, Classification, and Objectives, #Pixabay.

    #Objectives of Cash Flow Statement:

    The primary objectives of the cash flow statement are to supply the necessary information relating to the generation of cash to the users of the financial statement. It also highlights the future or prospective cash positions i.e. cash or cash equivalent. The inflows and outflows of cash can represent with the help of this statement.

    The main objectives of the cash flow statement are:

    Measurement of Cash:

    Inflows of cash and outflows of cash can measure annually. Which arise from operating activities, investing activities and financing activities.

    Generating inflow of Cash:

    Timing and certainty of generating the inflow of cash can know. Which directly helps the management to take financing decisions in the future.

    Classification of activities:

    All the activities are classifying into operating activities, investing activities and financing activities. Which help a firm to analyze and interpret its various inflows and outflows of cash.

    Prediction of the future:

    A cash flow statement, no doubt, forecasts the future cash flows. Which help the management to take various financing decisions since synchronization of cash is possible.

    Supply necessary information to the users:

    A cash flow statement supplies various information relating to inflows and outflows of cash to the users of accounting information in the following ways:

    • Assess the ability of a firm to pay its obligations as soon as it becomes due.
    • Analyze and interpret the various transactions for future courses of action.
    • To see the cash generation ability of a firm, and.
    • Ascertain the cash and cash equivalent at the end of the period.
    Helps the management to ascertain 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.

    Evaluation of future cash flows:

    Whether the cash flow from operating activities is quite sufficient in the future to meet the various payments e.g. payment of expense/debts/dividends/taxes.

    Assessing liquidity and solvency position:

    Both the inflows and outflows of cash and cash equivalent can know, and as such, liquidity and solvency position of a firm can also maintain as timing and certainty of cash generation knows i.e. It helps to assess the ability of a firm to generate cash.

    #Limitations of the Cash Flow Statement:

    Despite several uses, the cash flow statement suffers from the following limitations:

    • As the cash flow statements based on the cash basis of accounting. It ignores the basic accounting concept of accrual basis.
    • A cash flow statements, not a substitute for an income statement it is complementary to an income statement. Net cash flow does not mean the net income of a firm.
    • A cash flow statement is also not a substitute of funds flow statement which. Provides information relating to the causes that lead to an increase or decrease in working capital.
    • The comparative study of cash flow statements may give misleading results.
    • Some people feel that as working capital is a wider concept of funds. A funds flow statement provides a more complete picture than the cash flow statement, and.
    • Cash flow statements not suitable for judging the profitability of a firm as non-cash charges are ignored while calculating cash flows from operating activities.
  • Fund Flow Statement: Explanation, Importance, and Structure

    Fund Flow Statement: Explanation, Importance, and Structure

    What does the Fund Flow Statement mean? Funds flow statement is the statement of sources and uses of the fund. Fund Flow Statement: Explanation, Importance, and Structure. Funds flow statement shows the source from which the funds are received and the areas to which they obtained funds have been utilized. Funds flow statement indicates various mean by which funds were received during a particular period and the ways in which these funds were applied. Also learned, Venture Capital: Introduction, Definition, Characteristics, Advantages, and Disadvantages.

    The Concept of Fund Flow Statement.

    The topic is studying; Explanation of Fund Flow Statement, Meaning of Fund Flow Statement, Definition of Fund Flow Statement, Importance of Fund Flow Statement, and Structure of Fund Flow Statement. Funds flow statement comprises three words- fund, flow, and statement. “Fund” means the financial resources used by a concern. In the sense of working capital. The excess current asset over the current liabilities is called net working capital.

    Similarly. The term “Flow” means the movement of funds and includes both inflows (receipt) and outflows (payments) of found. Funds from the operation, issue of share and debentures, additional long term debt, non-operating revenues etc. are considered as the major sources of fund. Increase in working capital, the redemption of the debenture, repayment of the long term loan, payment for non-operating expenses etc. are the amine areas of uses of the fund.

    The term “Statement” represents the format or account under which the flows of fund i.e. cash inflows and outflows are recorded. Funds flow statement is known by various names such as statements of sources and uses of funds, the summary of financial operations, which got and where go statement, movement of the working capital statement, funds received and disbursement statement etc.

    #Explanation of Fund Flow Statement:

    The balance sheet and income statement are the traditional basis financial statements of concern. They furnish useful financial information regarding the operation of the concern; however, a serious limitation of these statements is that they fail to provide of time regarding changes in the financial position of a concern during a particular period of time. Funds flow statement, which is known as the statement of changes in financial position, overcomes these limitations of traditional financial statements.

    Funds flow statement is the statement of sources and uses of the fund. Funds flow statement shows the source from which the funds are received and the areas to which they obtained funds have been utilized. Funds flow statement indicates various mean by which funds were received during a particular period and the ways in which these funds were applied.

    Meaning of Fund Flow Statement:

    A fund flow statement is a statement in summary form that indicates changes in terms of financial position between two different balance sheet dates showing clearly the different sources from which funds are obtained and uses to which funds are put. The profit and loss account and balance sheet statements are the common important accounting statements of a business organization.

    The profit and loss account provides financial information relating to only a limited range of financial transactions entered into during an accounting period and its impact on the profits to be reported. The balance sheet contains information relating to capital or debt raised or assets purchased. But both the above two statements do not contain a sufficiently wide range of information to make an assessment of the organization by the end user of the information.

    In view of the recognized importance of capital inflows and outflows, which often involve large amounts of money should be reported to the stakeholders, the funds flow statement is devised. In funds flow analysis, the details of financial resources availed and the ways in which such resources are used during a particular accounting period, are given in a statement form called “Funds flow statement”.

    The sources of funds also include the funds generated from operations internally. The funds flow statement can explain the reasons for the liquidity problems of the firm even though it is earning profits. It helps the efficient working capital management and indicates the ability of the firm in servicing its long-term debt obligations. The changes in working capital position can also be tracked by observing the surplus/deficit of funds during a particular accounting period.

    Definition of Fund Flow Statement:

    Funds Flow Statement is a method by which we study changes in the financial position of a business enterprise between the beginning and ending financial statements dates. It is a statement showing sources and uses of funds for a period of time.

    Some definitions of financial experts are given for the clear conception of fund flow statement:

    Foulke defines these statements as:

    “A statement of sources and application of funds is a technical device designed to analyze the changes in the financial condition of a business enterprise between two dates.”

    According to R. N. Anthony:

    “The fund’s flow statement describes the sources from which additional funds were derived and the use to which these sources were put.”

    I.C.W.A. in Glossary of Management Accounting terms defines Funds Flow Statement as,

    “A Statement prospective or retrospective, setting out the sources and applications of the funds of an enterprise. The purpose of the statement is to indicate clearly the requirement of funds and how they are proposed to be raised and the efficient utilization and application of the same.”

    Roy A. Fouke defines a fund flow statement as,

    “A statement of sources and application of funds is a technical device designed to analyze the changes in the financial condition of a business enterprise between two dates.”

    Thus, the fund flow statement reveals the volume of financial transactions and explains the flow of funds taking place within a business during a particular period of time and its effect on the net working capital. It is not a substitute for either the Profit and Loss Account or the Balance Sheet, but it is a useful supplement to them. It describes the sources from which funds are obtained and the uses of these funds, in a condensed form.

    #Importance of Fund Flow Statement:

    A funds flow statement is an essential tool for financial analysis and is of primary importance to financial management. Nowadays, it is being widely used by the financial analysts, credit granting institutions and financial managers.

    The basic purpose of a funds flow statement is to reveal the changes in the working capital on the two balance sheet dates. It also describes the sources from which additional working capital has been financed and the uses to which working capital has been applied.

    The importance of fund flow statement may be summarised:

    Analyses Financial Statements:

    Balance Sheet and Profit and Loss Account do not reveal the changes in the financial position of an enterprise. Fund flow analysis shows the changes in the financial position between two balance sheet dates. It provides details of inflow and outflow of funds i.e., sources and application of funds during a particular period.

    Hence it is a significant tool in the hands of the management for analyzing the past, and for planning the future. They can infer the reasons for imbalances in the uses of funds in the past and take corrective measures for the future.

    Answers Various Financial Questions:

    Fund flow statement helps us to answers various financial questions such as:

    • How many funds flowed into the business?
    • How much of these funds were provided by the operations?
    • What are the other sources of funds?
    • How were these funds used?
    • Why was there less/more amount of net working capital at the end of the period than at the beginning?
    • Why were the dividends not larger?
    • How was the purchase of fixed assets financed?
    • Where has the net profit is gone?
    • How were the loans repaid?

    Rational Dividend Policy:

    Sometimes it may happen that a firm, instead of having sufficient profit, cannot pay dividend due to inadequate working capital. In such circumstances, fund flow statement shows the working capital position of a firm and helps the management to take policy decisions on dividend etc.

    Proper Allocation of Resources:

    Financial resources are always limited. So it is the duty of the management to make its proper use. A projected fund flow statement enables the management to take the proper decision regarding allocation of limited financial resources among different projects on a priority basis.

    Guide to Future Course of Action:

    The future needs of the fund for various purposes can be known well in advance from the projected fund flow statement. Accordingly, timely action may be taken to explore various avenues of the fund. A projected funds flow statement also acts as a guide for the future to the management.

    The management can come to know the various problems it is going to face in near future for want of funds. The firm’s future needs of funds can be projected well in advance and also the timing of these needs. The firm can arrange to finance these needs more effectively and avoid future problems.

    Proper Managing of Working Capital:

    It helps the management to know whether working capital has been effectively used to the maximum extent in business operations or not. It depicts the surplus or deficit in working capital than required. This helps the management to use the surplus working capital profitably or to locate the resources of additional working capital in case of scarcity. A funds flow statement helps in explaining how efficiently the management has used its working capital and also suggests ways to improve the working capital position of the firm.

    Guide to Investors:

    It helps the investors to know whether the funds have been used properly by the company. The lenders can make an idea regarding the creditworthiness of the company and decide whether to lend money to the company or not.

    Evaluation of Performance:

    Fund flow statement helps the management in judging the financial and operating performance of the company.

    Fund Flow Statement Explanation Importance and Structure
    Fund Flow Statement: Explanation, Importance, and Structure, #Pixabay.

    #Structure of Fund Flow Statement:

    The structure of fund flow statement like other accounting statements is based on the equality of financial assets and liabilities.

    To bring the form of fund flow statement on a scientific line, the fund flow statement is divided into two parts:

    • Schedule of working capital changes, and.
    • Statement of sources and uses of the fund.

    Now explain;

    Schedule of Working Capital Changes:

    This schedule is also called “Comparative Change in Working Capital Statement” of “Statement of Working Capital Changes” or “Working Capital Variation Statement” or “Net Current Assets Account” or “Working Capital Account”. The increase in working capital is treated as use of fund and decrease in working capital is termed as sources of fund.

    This statement or schedule is prepared in such a way or form as to indicate the amount of working capital at the end of two years as well as increase or decrease in the individual items of current assets and current liabilities.

    The following rules should be taken into account while ascertaining the increase or decrease in individual items of current assets and current liabilities and its impact on working capital:

    • Increase in the items of Current Assets will increase the Working Capital.
    • The decrease in the items of Current Assets will decrease the Working Capital.
    • Increase in the items of Current Liabilities will decrease the Working Capital.
    • The decrease in the items of Current Liabilities will increase the Working Capital.

    Statement of Sources and Uses of Fund:

    This is the second but most important part of Fund Flow Statement. It is prepared on the basis of the changes in Fixed Assets. The preparation of Statement of Sources and Uses of Fund involves the ascertainment of increase/decrease in the various items of fixed assets, long term liabilities and share capital in the light of additional information given below.

    To give an idea of the different items of sources and uses, the probable items of sources and uses of the fund are tabulated below.

    Sources of Fund:

    The following sources below are;

    • An issue of fresh shares (derived from an increase in share capital).
    • The Issue of Debentures (derived from the increase in debentures).
    • Raising of new loans (derived from the increase in long term loans).
    • Sale of fixed assets for cash or for other current assets (derived from the decrease in fixed assets and additional information).
    • Non-trading income.
    • Profit from operations (before deducting non-cash items of expenses and losses and before adding non-cash, non-trading income), and.
    • The decrease in working capital (derived from the schedule of working capital changes).
    Uses of Fund:

    The following uses below are;

    • Redemption of Preference Shares in cash (derived from the decrease in share capital).
    • Redemption of debentures in cash (derived from the decrease in debentures).
    • Repayment of loans (derived from the decrease in long-term loans).
    • Purchase of fixed assets for consideration other than shares, debentures or long term debt (derived from the increase in fixed assets and additional information).
    • Loss from operations.
    • Payment of dividend in cash, and.
    • Increase in working capital (derived from the schedule of working capital changes).