Question

How are the statement of cash flow used by organizations--- give a specific example?

Answer 1

Cash Flow statement basically summarizes cash transactions of a business during a given accounting period and categorizes them under cash flows from operating, investing and financing activities. It shows the movement of cash during the period by indicating whether a particular line item is a cash in-flow or cash out-flow. Presentation of statement of cash flow is explained by IAS 7.

Statement of Cash flow are used by organization in the following way-

1. It elaborates the reason for the difference between the cash balance at the beginning and end of the year. It identify the reason for the changes in the cash balances irrespective level of the profits earned.
2. Budgeted cash flow statement is important tool for financial planning. For instance with budgeted cash flow statement, surplus cash (if any) can be planned to be invested in opportunities.

                                             Budgeted cash flow statement for year 2017

           Cash from operation Activity                                                20000 $

           Cash from Investing Activity                                                 25000 $

           Cash from Financing Activity                                                1500 $

          Net change in cash flow                                                      46500 $

           Beg Cash balance                                                                Nil

           Budgeted Closing cash balance                                          46500 $

          Now this 46500 $ cash can be planned to be used purchasing non- current asset, Repaying debt in future.

         3. Income statement is prepared with matching concept keeping in mind but statement of cash flow is not        bound by such restriction. Hence it provides the extended view of transaction either capital or revenue.

        4. It assists the management to maintain an appropriate level of cash resources.It guides the management on the prospective demands and supply of cash resources through projected cash flows.

       5. Cash flow statement provides an insight into the critical areas of bussiness operation. It also allows investors in predicting the amount of cash likely to be distributed in the future in the form of dividend or repayment of principal and in the evaluation of risk. High cash rich companies are likely to be less risky for example Apple Inc.

     6. It is also useful in checking the accuracy of past assessments of future cash flows. Soundness of Cash availability in earlier year can also be identified using historical statement of cash flow.

An self explanatory example of cash flow Statement is presented below - Each of the above point can be easily linked with the below statement.

Cash flows from operating activities	$	$
Net income		20,000
Adjustments for:
Depreciation (+)	12500
Profit on sale of Land (-)	(6500)
		6000
Increase in trade receivables (-)	(25000)
Decrease in inventories(+)	32500
Decrease in trade payables(-)	(5000)
		2500
Cash generated from operations		$ 28500
Cash flows from investing activities
Purchase of Equipment (-)	(500,00)
Proceeds from sale of Land (+)	8000
Net cash used in investing activities		$ (42000)
Cash flows from financing activities
Proceeds from issue of common stock	15000
Proceeds from issuance of long-term loan	17500
Dividends paid	(4500)
Cash generated in financing activities		$ 28000
Net increase in cash and cash equivalents		14500
Cash and cash equivalents at beginning of period		20500
Cash and cash equivalents at end of period		$ 35000

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