Never off your hands or eyes on your cash flow because it’s your last saving of the business budgets .
Cash Flow is the increase or decrease in the amount of cash and cash equivalent resulting from any business dealing. When an accounting period ends, the trading profit and loss account plus the balance sheet are calculated.
These two accounting statements do not tell us clearly about the movement of cash and its application in the accounting period. A third financial statement known as a Cash Flow Statement is always prepared in accordance with an International Accounting Standards Seven (IAS 7).
Cash Flow statements emphasize the liquidity position of any organization. They also explain the reasons for such inflows and outflows of cash during the period. Helps the management to know how much funds are required for what purposes, how to plan to used the homecoming for business wisely, how much cash is generated from internal sources, how much cash can be procured from outside the business to know the out stand. It helps also to prepare cash budgets It provides an explanation for increases and decreases in cash and cash equivalent.
Advantages of creating a cash flow statements
These statements expose the success and failure of cash planning.
This can be done by comparing the projected cash flow statement with the actual cash flow statement and remedial measures can also be taken.
It enables efficient cash management, analyzing cash flow enables evaluation of financial policies and cash proportion.
Cash Flow analysis helps manage Internal finances hence providing information about money that is available from the business operations.
They disclose the movement of cash including the increase and decrease of cash and the reason why that is happening.
It also shows why there are low cash balances considering the heavy operating profits or for heavy cash balance in spite of low profits.
Since Cash Flow Statement presents the cash position of a firm at the time of making payment it directly helps to verify the liquidity position, the same is applicable for profitability. Cash Flow Statement also helps to verify the capital cash balance or expencess of businesses
Disadvantages of creating cash flow statements
The cash flow statement cannot be equated with the income statement. An income statement takes into account both cash as well as non-cash items which the cash flow statement does not do. Cash flow statement has limited scope because it cannot reveal net income from operation. Cash flow statement cannot show the complete and up-to-date financial position of the firm. It may provide wrong information if there is wrong data in the balance sheet. This implies that net income does not correspond to the net cash flow of the business.
When cash balance is disclosed it does not represent the actual liquidity of the business due to influences of postponed payments and purchases.
The income statement cannot be replaced by the cash flow statement since they each play a different role.
Presentation of creating cash flow statements
Cash flow statements are prepared and presented in accordance with IAS 7 which states that cash flows during the business period have to be classified and presented in three main headings as shown below.
Cash flow from or towards investing activities.
Cash flow from or towards financing activities.
Cash flow from operating activities.