Each business operates its day to day activities with cash and the majority of the transactions of a business is in cash. However, financial statements like profit & loss statements and balance sheet, for the most part, revolves around the financial resources and financial position leaving cash exchanges aside. To fill this hole, the idea of the cash flow statement was introduced. Cash Flow Statement (CFS) for the most part is concerned with the cash equivalents and cash transaction. Despite the fact that these statements do not show the financial resources of a firm but howsoever it plays an important role in the working of a business.
Cash and Cash Equivalents
There is an uncertainty in regards to the difference between cash and cash equivalent. Let us know what the distinction among them and what makes them so extraordinary. Cash is nothing but money which implies cash in hand or cash in the bank.
Yet, with regards to Cash Equivalents it something which can be promptly converted into cash. At the end of the day, we can say it as something which has high liquidity ratio. This may include bank overdraft, short term investments, demand drafts or deposits and so forth.
As per the dictionary, cash flow implies the movement of cash. Normally, cash flow can be characterized in two sorts they are Inflow of cash or outflow of cash. The cash transactions that raise the amount of cash in the business are cash inflows like receipts from debtors, the sale of fixed resources and so forth. And the cash exchanges which diminishes the flow of cash are called cash flows like creditors or payment of loan interest.
Benefits of a Cash Flow Statement
Cash Flow Statement helps in knowing the definite figure of cash inflows and outflows from different tasks of the business. It helps in looking at the cash budgets of past evaluations with the present to analyze the future cash requirement. It gives the exact data about the cash-based exchanges in the business.
Cash flow statement significantly utilized in creating cash budget plan for future needs and also assist in knowing the periodical necessity of cash in the business.
It uncovers the key changes needed to know the financial position of the business and organizes significant activities to the administration.
It gives the data about different financing and investing transaction of cash taking place during the year and assists in assessing the financial structure of the business. Cash Flow Statement helps in knowing the profitability of the business when it is matched with the ratio analysis.
Limitations of the Cash Flow Statement
Cash Flow Statement (CFS) is just limited to the transaction that is related to cash, leaving the other cash transaction and long term assets and liabilities.
Despite the fact that it plays a significant role in the business but it has restricted use when compared with Income and expenditure account or profit and loss statements.
These statements do not reveal the total income or profit from the different tasks executed throughout a year in the business.