IGNOU : M.COM : MCO 5 : UNIT 7 : Q - 4. What is a ‘Cash Flow Statement’? Explain the techniques of preparing a cash flow statement.

Ans. Cash Flow Statement

An inflow of funds increases the working capital. Under cash flow analysis, all movements of cash, rather than the inflow and outflow of working capital would be considered. In other words, cash flow analysis, focuses attention on cash instead of working capital. When the movements of cash (i.e., cash inflow and cash outflow) is depicted in a statement, it is called Cash Flow Statement.

techniques of preparing a cash flow statement

1. Sources and Uses of Cash

The change in the cash position is computed by considering ‘Sources’ and ‘Applications’ of cash which are as follows: Sources of cash The sources of cash includes:

1) Cash from Operations

2) Issue of Shares

3) Issue of Debentures

4) Long term Loans Raised

5) Sale of Fixed Assets

Application (uses) of cash

Application of cash includes the following:

1) Redumption of Preference Shares

2) Redumption of Debentures 3) Repayment of Loans 4) Purchase of Fixed Assets

5) Payment of Dividends

6) Payment of Taxes

2. Ascertaining Cash from Operations

You have learnt that the main purpose of preparing a cash flow statement is to explain the increase/decrease in the cash balance between the two balance sheet dates and that it is prepared on the same pattern as the fund flow statement. Just as the net profit is adjusted to ascertain the amount of funds from operations, the funds from operations are now adjusted to ascertain the cash from operations. For this purpose, you have to look at the changes in current assets and current liabilities that have taken place during the year.

Conversion of ‘Funds from Operations’ to ‘Cash from Operations’ is necessary because, under the working capital concept, funds from operations are based on accrual concept of accounting, and total sales (whether credit or cash) and total purchases (whether credit or cash) are recognised as sources and uses of working capital respectively. But under a cash concept of funds only cash sales and receipts from debtors are treated as sources of cash, while cash purchases and payment to creditors are regarded as uses of cash. The same holds good for the other incomes and expenses. Therefore, funds from operations (based on the accrual concept) require conversion into cash from operations (based on cash accounting).