In today’s world every company run with the motive of gaining profit. In order to know what they earn and what they spend every company or individual maintains a books of account. Thus to know the financial position of the business a financial statement is prepared which consists of Balance sheet, Profit and loss account, Cash flow statement, Changes in equity and notes to accounts. Hence Cash flow statement is prepared as a mandatory part of the financial statement.
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Cash flow statement shows the amount that has been spent by the company, the source of flows of cash in the company, the change of cash flows from one period to another and the reasons of deficit (if any) in the company. The different types of investments and inflows are divided in different parts. For example: Cash from operating activities, cash from investing activities and financing activities. It shows amount invested in fixed assets in different heads and amount invested in shares debentures in different heads. Cash flow statements are prepared in two ways: direct method and indirect method. As per direct method only the operating Cash revenues are shown along with the operating cash expense. Any differences between these two are known as cash from operating activities. This method doesn’t include any non cash activities like preliminary expenses or amortisation of depreciation etc.
According to indirect Method, net profit and loss is the basis to prepare the statement with the adjustment of adding or subtracting the non operating expenses or income. It also shows the adjustments for increase or decrease in the current assets to arrive at cash from operating activities. The heads are further divided into cash from investing activities and cash from financial activities. Cash from investing activities shows the cash invested in long term assets or inflow of cash from sale of assets. Cash from Financial activities shows the amount sent on shares or income received.
Cash flow statement helps to evaluate the cash position of the company. The way it is invested and the sources of funds to the company. Every company has the choice of accepting the method to be used to prepare cash flow statement. Income statement is prepared in accrual basis but cash flow statement is prepared for the flow of cash which shows the position of cash in the company. It even helps to predict the future cash inflow which in turn helps to evaluate how the company would spend the amount in future. It helps the company to take the major decision related to cash outflows. Also income statement helps the investor to know the cash flows of the company.
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Cash flow statement is the important part of the organisation to know the organisation actual position in terms of cash and to evaluate the future investment. It even helps to know the liquidity position of the company.
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