Cash Flow Statement - Management Accounting for LDCE
« Meaning: A statement which discloses the changes in Cash position between two periods (usually 31st March of previous year to 31st March of current year)
« Example: A Balance sheet shows a cash balance as on 31.03.2019 at Rs. 5 lakhs, while the same position as on 31.03.2020 at Rs. 6 lakhs. That means cash inflows during the year 2019-20 is Rs.1 lakh.
« The statement also outlines the reasons for such cash inflows or cash outflows, which in turn helps to analyze the functioning of Business.
« It is an important tool in the hands of Business Management.
« Components of Cash are 1. Cash on Hand 2. Cash at Bank 3. Short term, highly liquid investments that are readily convertible into cash.
1. Efficient in Cash Management - Helps how much cash will be available at a particular point of time to meet the day to day obligations.
2. Helps in internal financial management.
3. Discloses the movement of cash during the financial year. Understanding and analysis of what are the sources & applications of cash.
4. Past years cash flow statement is used as an estimate for next year's cash flow.
5. Shows the success / failure of cash management.
6. Comparison between two firms.
7. Analysis of relationship between profitability and net cash flow.
1. Cash flow statement cannot serve the purpose of Profit and Loss Account. Because later covers both cash items and non cash items, whereas former covers only cash items.
2. Cash flow statement can't replace the Fund flow statement. The later one is reflecting the complete financial picture than the former one.
3. Cash balance as per Cash flow statement cannot represent the real liquid position of the firm, because of postponing of purchases & other payments.
4. Very difficult to define the term "Cash". whether the items like cheques, stamps, postal orders etc are comes under purview of cash or not.