cash flow.docx
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INTRODUCTION
Management accounting is defined as processes and techniques that are focused on
the effective use of organizational resources to support managers in their task of enhancing
both customer value and shareholder value. We outline the recent changes in the business
environment that have influenced the development of management practices and management
accounting systems, and management accounting is distinguished from financial accounting.
The processes and techniques of management accounting that are used to enhance value
include systems to support the formulation and implementation of strategy; process
improvement and cost management techniques to help develop and manage a firm’s
competitive advantage; planning and control systems to help managers manage resources;
and estimates of the cost of products and services to support strategic and operational
decisions.
IMPORTANCE OF FINANCIAL STATEMENTS
Requirement of lenders
Guides future course of action
To understand the future
To exercise control
Better awareness of present position
Arithmetic accuracy to future plans
TOOL OF ANALYSIS1. Vertical Form
2. Cash flow statement
3. Common size statements
4. Trend
5. Ratio
6. Fund Flow Statement
7. Comparative
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What Is Cash Flow Statement?
Definition of 'Cash Flow'A summary of the actual or anticipated incomings and outgoings of cash in a firm over an
accounting period (month, quarter, year).
It answers the questions:
Where the money came (will come) from?
Where it went (will go)?
Cash flow statements and projections express a business's results or plans in terms of cash in and out
of the business, without adjusting for accrued revenues and expenses. The cash flow statement doesn't
show whether the business will be profitable, but it does show the cash position of the business at any
given point in time by measuring revenue against outlays.
IMPORTANCE OF CASH FLOW STATEMENT The cash flow statement provides information regarding inflows and outflows of cash of
a firm for a period of one year. Therefore cash flow statement is important on the
following grounds.
1.Cash flow statement helps to identify the sources from where cash inflows have arisen
within a particular period and also shows the various activities where in the cash was
utilized.
2. Cash flow statement is significant to management for proper cash planning and
maintaining a proper matching between cash inflows and outflows.
3. Cash flow statement shows efficiency of a firm in generating cash inflows from its
regular operations.
4.Cash flow statement reports the amount of cash used during the period in various
long-term investing activities, such as purchase of fixed assets.
5. Cash flow statement reports the amount of cash received during the period through
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various financing activities, such as issue of shares, debentures and raising long-term
loan.
6. Cash flow statement helps for appraisal of various capital investment programmes to
determine their profitability and viability.
The cash flow statement organizes and reports the cash generated and used in the following
categories:
1. Cash Provided From or Used By Operating ActivitiesThis section of the cash flow statement reports the company's net income and then converts it
from the accrual basis to the cash basis by using the changes in the balances of current asset
and current liability accounts, such as:
Accounts Receivable
Inventory
Supplies
Prepaid Insurance
Other Current Assets
Notes Payble
Accounts Payable
Wages Payable
Payroll Taxes Payable
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Interest Payable
Income Taxes Payable
Unearned Revenues
Other Current Liabilities
In addition to using the changes in current assets and current liabilities, the operating
activities section has adjustments for depreciation expense and for the gains and losses on the
sale of long-term assets.
2. Cash Provided From or Used By Investing ActivitiesThis section of the cash flow statement reports changes in the balances of long-term asset
accounts, such as:
Long-term Investments
Land
Buildings
Equipment
Furniture & Fixtures
Vehicles
In short, investing activities involve the purchase and/or sale of long-term investments and
property, plant, and equipment.
3. Cash Provided From or Used By Financing ActivitiesThis section of the cash flow statement reports changes in balances of the long-term liability
and stockholders' equity accounts, such as:
Notes Payable (generally due after one year)
Bonds Payable
Deferred Income Taxes
Preferred Stock
Paid-in Capital in Excess of Par-Preferred Stock
Common Stock
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Paid-in Capital in Excess of Par-Common Stock
Paid-in Capital from Treasury Stock
Retained Earnings
Treasury Stock
In short, financing activities involve the issuance and/or the repurchase of a company's own
bonds or stock as well as short-term and long-term borrowings and repayments.
4. Supplemental InformationThis section of the cash flow statement discloses the amount of interest and income taxes
paid. Also reported are significant exchanges not involving cash. For example, the exchange
of company stock for company bonds would be reported in this section.
There are following two methods of cash flow statement:
Direct MethodWhen using the direct method, you list cash flows in the operations section of the cash flow
statement. Cash flows due to operations arise from customer collections and cash paid to
suppliers, employees and others. The section also reports cash paid for income tax and
interest. The problem in trying to use the direct method is that a company might not keep the
information in the required form. For example, companies using accrual accounting lump
together cash and credit sales -- they would have to make special provision to track cash sales
separately.
Indirect MethodIn the indirect method, you adjust net income to convert it from an accrual to a cash basis.
This requires you to add back non-cash expenses such as depreciation, amortization, loss
provision for accounts receivable and any losses on the sale of a fixed asset. You also adjust
net income for changes between the starting and ending account balances in current assets --
excluding cash -- and current liabilities for the period. These accounts include accounts
receivable, inventory, supplies, prepaid assets, payable liabilities and unearned revenues.
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ConsiderationsThe indirect method uses readily available information and most companies find it easier to
employ. Management and shareholders might fret if a company consistently reports net
income exceeding cash flows -- they will want to identify the sources of non-cash income and
determine whether these are masking serious problems with the business. If you believe that
“cash is king,” you will look to the cash flow statement to measure the company’s liquidity --
the ability to pay bills and avoid defaulting on debt. Cash shortages can lead to bankruptcy,
whereas excess cash might indicate a need to take steps such as increasing investments,
paying down debt, increasing executive salaries or distributing dividends.
Requirement for preparation of cash flow statementThe management of cash flow is so important for businesses, most analysts recommend that
someone study a cash flow statement at least every quarter. The cash flow statement is a
financial report that will describe the sources of a company's cash and where it was spent
over a certain period of time.
IN THE BOOKS OF RELIANCE CO.BALANCE SHEET FOR TWO YEARS ENDING 2011-12 & 2012-13
2011-2012 2012-2013
PARTICULARS AMT AMT AMT AMT AMT AMTSOURCES OF FUNDS OWNERS FUNDS Equity share capital 215.95 216.15 ADD:- RESERVES AND SURPLUS 2417.3 3296.11 NET WORTH 2633.92 3512.93 APPLICATION OF FUNDS
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FIXED ASSETS
GROSS BLOCK3579.62 3574.62
LESS:-Depraciation2169.16 1416.88
NET FIXED ASSETS 2169.16 2157.74 INVESTMENTS 1260.68 2438.21 WORKING CAPITAL A. CURRENT ASSETS QUICK ASSETS cash and Bank Balance 1358.1 1319.99 Debtors 943.2 678.99 TOTAL QUISK ASSETS 2301.3 1998.98 NON-QUICK ASSETS Inventories 2811.2 2516.65
Loans and advances1099.72 1314.72
TOTAL NON-QUICK ASSET
3910.92 3831.37
B.CURRENT LIABILITIES 5688.44 QUICK LIABLITIES
Provisions1324.98 1945.92
TOTAL CURRENT LIABILITIES
7589.19 7634.36
NET CURRENT ASSETS 1095 1293.96 TOTAL FUNDS EMPLOYED 2633.92 3512.93
IN THE BOOKS OF RELIANCE CO.
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CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST MAR. 2013
PARTICULARS AMT AMT AMT
CASH FLOW FROM OPERATING ACTIVITIES
NET PROFIT 301.81
ADJUST NON CASH AND NON-OPERATING ITEM
Depreciation and Amortisation1817.62
Lease equalisation adjusted income -4.52loss/profit on sale of assets -2.96Profit on sale of investment -43.91Profit on sale of a division -82.25Provision for loan given 245Provision for intercorporate deposit 5.29Income tax -126.88Dividend -656.52
Exchange difference 199.3913456.51
OPERATING PROFIT BEFORE CAPITAL CHANGES 1648.32
ADJUST WORKING CAPITAL CHANGES
Decrease in inventories 129.42Decrease in finance receivables 890.28Increase in other current assets 64.76incresae in trade payables -138.3Increase in other current liabilities -249.93Decrease in provisions -381.5
188.06 502.79
CASH GENERATED FROM OPERATIONS 2151.11
Income tax paid -107.33
NET CASH FROM OPERATING2258.44
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CASH FLOW FROM INVESTING ACTIVITIES
Payment of fixed assets -2605.33Sale of fixed assets 16.95Sale of division 110Loans to associates 194.36Advance towards investment in subsidiaries -16.82Investment in subsidiary company -186.12Investment in associate company -0.01Investment in others -0.84Investment in mutual funds -315.51Decrease in investment 0.61Redemption of investment in subsidiary company 1378.95pRedemption in investment in associate company 1Deposits of margin money 75Realisation of margin money 0.53Fixed deposit with scheduled bank -1.38
NET CASH FROM INVESTING ACTIVITIES 991.5
CASH FLOW FOR FINANCING ACTIVITIES
Premium on redemption -886.95Brokerage on debentures -93.02Premium paid on debentures -96.55Issue of shares 0.16Repayment of fixed assets -1868.38Proceeds from long term borrowing 2562.84Repayment of long term borrowing -3777.47
NET CASH USED IN FINANCIAL ACTIVITIES
-1809.42
NET INCREASE IN CASH AND CASH EQUIVALENT -735.75
CASH AND CASH EQUIVALENT AT BEGINNING1001.32
CASH AND CASH EQUIVALENT AT END -265.57
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COMMENTS:-
After completing the above cash flow statement it is observed that the position of cash flow
statement is deteriorating day by day .there are many factors which is responsible for this.
Following are the reasons :-
Cash flow from operating is showing outflow of 2258.44
High investment in fixed assets reject outflow of 991.50
Even though company suffered loss cash flow from financing is showing flow of
(1809.42)
SUGGESTIONS:-The company should curtail investment in investing activity and repay to creditors after
liquidity
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