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Cash plays a very important role in the economic life of a business.

A firm needs cash to make payment to its suppliers, to incur day-to-day expenses and to pay salaries, wages, interest and dividends etc. In fact, what blood is to a human body, cash is to a business enterprise. Thus, it is very essential for a business to maintain an adequate balance of cash. For example, a concern operates profitably but it does not have sufficient cash balance to pay dividends, what message does it convey to the shareholders and public in general. Thus, management of cash is very essential. There should be focus on movement of cash and its equivalents. Cash means, cash in hand and demand deposits with the bank. Cash equivalent consists of bank overdraft, cash credit, short term deposits and marketable securities Operating activities are the principal revenue generating activities of the enterprise. (b) Investing activities include the acquisition and disposal of longterm assets and other investments not included in cash equivalents. (c) Financing activities are activities that result in change in the size and composition of the owners capital (including Preference share capital in the case of a company) and borrowings of the enterprise. Should the individual financial statements provide information to assist users to assess solvency? 41. The existing frameworks discuss the individual financial statements in terms of providing information to help users assess the entitys ability to generate cash flows, including the timing and uncertainty of those cash flows, information that in turn is intended to assist users in making economic decisions.17 This includes information about liquidity and solvency.18 In other words, assisting users in assessing an entitys liquidity and solvency is onebut not the onlyobjective of the information provided in the individual financial statements. 42. The notion that information provided in the financial statements should assist users in assessing an entitys liquidity and solvency seems consistent with the overall objective of decision-usefulness. For example, a prospective lender who is considering advancing funds to an entity would be interested in assessing the entitys liquidity and solvency, such as its ability to generate cash flows sufficient to meet interest and/or principal repayments, and the likelihood of the entity going into liquidation. 43. Although it seems reasonable that individual financial statements should provide users with information to assist them in assessing an entitys liquidity and solvency, that objective should be consistent with the overall objective of financial reportingproviding information that is useful to a wide range of users in making economic decisions (assuming that the Boards confirm that overall objective). In particular, it would be inconsistent with that overall objective of providing information to a wide range of users if the information

provided in the individual financial statements was focused on meeting the information needs of particular users that primarily use the financial statements to help them assess an entitys liquidity and solvency, such as lending institutions or bank regulators.

to determine a project's rate of return or value. The time of cash flows into and out of projects are used as inputs in financial models such as internal rate of return and net present value.

to determine problems with a business's liquidity. Being profitable does not necessarily mean being liquid. A company can fail because of a shortage of cash even while profitable.

as an alternative measure of a business's profits when it is believed that accrual accountingconcepts do not represent economic realities. For example, a company may be notionally profitable but generating little operational cash (as may be the case for a company that barters its products rather than selling for cash). In such a case, the company may be deriving additional operating cash by issuing shares or raising additional debt finance.

cash flow can be used to evaluate the 'quality' of income generated by accrual accounting. When net income is composed of large non-cash items it is considered low quality.

to evaluate the risks within a financial product, e.g. matching cash requirements, evaluating default risk, re-investment requirements, etc.

Cash flow is a generic term used differently depending on the context. It may be defined by users for their own purposes. It can refer to actual past flows or projected future flows. It can refer to the total of all flows involved or a subset of those flows. Subset terms include net cash flow, operating cash flow and free cash flow.

Sections of cash flow statement:


The cash flow statement is usually divided into three sections: Operating, investing and financing activities.

Operating Activities:
Operating activities involve the cash effects of transactions that enter into the determination of net income, such as cash receipts from sales of goods and services and cash payments to suppliers and employees for acquisition of inventory and expenses

Investing Activities:
Investing activities generally involve long term assets and include (a) making and collecting loans (b) acquiring and disposing of investments and productive long lived assets.

Financing Activities:
Financing activities involve liability and stock holder's equity items and include obtaining cash from creditors and repaying the amounts borrowed and obtaining capital from owners and providing them with

a return on, and a return of, their investment. Below is the typical classification of of cash receipts and payments according to operating, investing and financing activities.
Operating Activities: Cash inflows: From sales of goods or services. From return on loans (interest) and on equity securities. dividends Cash outflows: To suppliers for inventories. To employees for services. To government for taxes. To lenders for interest. To others for expenses. Investing Activities: Cash inflow: From sale of property, plant and equipment. From sale of debt or equity securities of other entities. From collection of principles on loans to other entities. Cash Outflows: To purchase property, plant and equipment. To purchase debt or equity securities of other entities. To make loans to other entities.

Income Statement Items

Generally Long Term Asset Items

Financing Activities: Cash inflows: From sale of equity securities. From issuance of debt ( bonds and notes ). Cash outflows: To stock holders as dividends To redeem long term debt or reacquire capital stock.

Generally Long term Liability and Equity Items

Some cash flow relating to investing or financing activities are classified as operating activities. For example, receipts of investment income ( interest and dividend ) and payment of interest to lenders are classified as operating activities. Conversely, some cash flows relating to operating activities are classified as investing or financing activities. For example, the cash received from the sale of property plant and equipment at a gain, although reported in the income statement, is classified as an investing activity, and effects of the related gain would not be included in net cash flow from operating activities. Likewise a gain or loss on the payment of debt would generally be part of the cash out flow related to the repayment of the amount borrowed, and therefore it is financing activity.

The Importance of Cash Flow Statements


Many business owners disregard the importance of cash flow statements because they unwittingly believe that their current financial standing can be construed from other financial reports and projections. Unfortunately, however, a cash flow statement is necessary to adequately assess the incoming and outgoing flow of cash and other resources in a business. Not only will a business owner with a cash flow system be more aware of his or her financial standing, but it will also help investors to make educated decisions on future investments. A business with regular and reliable cash flow statements shows more economic solvency, and is more attractive to investors.

A cash flow statement documents the incoming and outgoing cash in plain terms. Future sales and sales made for credit (unless they have been paid off) are not included in the cash flow statement, and most of the data will come from core operations. Payables and receivables should be expressly defined, as should depreciation of product value and inventory that has not yet been moved.

This can also help to track your investments next to your receivables and payables. Are your investments increasing or decreasing in value? And has your inventory moved at a steady pace? New or expanding businesses can expect to see a decrease in cash flow, but this doesn't mean that the business is going under. More stables businesses should see a steadily increase in cash flow over a period of several months or years. here are typically five different sections in a cash flow statement, though large businesses might have more complex cash flow systems as required. 1. Beginning Cash Balance - This is the amount of cash that the business has in its possession prior to the start of a cash flow statement period. Owed balances should not be considered here. 2. Projected Cash Sources - This includes any sources of income that will play a part in your cash flow, such as investments and royalties. 3. Projected Cash Uses - This is the amount of cash that the business expects to pay out over the cash flow period, including all costs of operation. 4. Projected Net Change - This is the Projected Cash Uses subtracted from the Beginning Cash Balance, which will give you the net change. (This number may be negative, in which case it should be indicated as a deficit). 5. Ending Cash Balance - This is the Projected Net Change added to the Beginning Cash Balance. You can create a cash flow system for your statements using a normal spreadsheet software such asMicrosoft Excel. However, larger businesses may require a sophisticated cash flow statement software that can adequately manage the amount of data inputted every month. Microsoft Dynamicshas several financial software options, as does Centage.