Nature & Significance of Cash Flow Statements
Cash flow statement as the name shows is a flow statement which covers a specific interval in time and is a justification of cash and cash equivalents balance shown in the balance sheet of the organization. International Accounting Standard (hereinafter referred as IAS) 7 deals with cash flow statements and requires that every organization should present a cash flow statement as an integral part of its Financial Statements....
It is beauty of Cash Flow Statement that it eliminates different types of accounting treatments and practices for the same items and in this way it enhances comparability and worthiness of financial statements with in same industry. The Cash Flow Statement if used with other Financial Statements gives true & fair picture of financial position of the organization in terms of its liquidity & ability to generate enough cash which is necessary to meet financial needs of the organization.
Statement of Cash Flow divides all activities of the entity into three main heads of activities
1. Operating Activities: such activities that relates to the core business of the entity falls under Operating Activities head.
2. Investing Activities: activities that are related to investments and other assets of the organization falls under Investing Activities head & finally
3. Financing Activities: activities that relates to long & short term borrowings of the organization and owner's equity.
in the ordinary course of business each and every organization performs different activities some are core business and revenue producing activities in which entire business is dependent i.e. core business activities of a bank is to lend money and core business of textile mill is to produce & sell cloths these are primary activities of the organization and generally shown in income statement of the organization these activities fall under the head of operating activities while preparing cash flow statement.
Logic behind separating entire activities of an organization in three different heads is to show ability of the organization to generate enough cash to meet its financial needs and organization has excess cash which it may invest or organization is dependent on borrowed money to run its business.
Now if organization is operating very well its operations should produce some excessive cash and the company will be in a position to make investments in other related revenue producing activities now the organization has many options it may expand its area of operations, replace its assets with newer models & may also make investments in other organizations as well these all activities are investing activities of the organization. On the other hand if its operations do not generate enough cash than the entity have to borrow money for its business such all borrowings repayment of loans and issuance of share capital etc falls under financing activities in cash flow statement.
The alarming situation starts when core activities of the organization goes to step down and its operating needs are not fulfilled by its own resources. And most alarming & worst situation arises when organization's operations as well as investments unable to generate enough cash to pay back its loans and organization needs and acquire further loan to repay existing loan in this situation the organization is suffering from high fever & if proper doze is not being given that boost up its operation it will goes into liquidation by the reason of bankruptcy.
Conclusion:
Cash flow statements helps management in using efficiently and effectively its cash & cash equivalents by highlighting the area's where organization needs special attention to enhance its liquidity and ability to generate cash. Since cash is life blood for every business the statement of cash flow if prepared in accordance with IAS 7 provides significant information about financial position of the organization and such information if used with other financial statements will show true and fair financial structure of the organization and will answer the following questions;
• Whether the organization is enable to pay back its loans at their maturity?
• Is it a beneficial decision to invest in the organization?
• How efficiently & effectively organization's resources are being used?
• What will be the expected future of the organization?
Cash flow statement as the name shows is a flow statement which covers a specific interval in time and is a justification of cash and cash equivalents balance shown in the balance sheet of the organization. International Accounting Standard (hereinafter referred as IAS) 7 deals with cash flow statements and requires that every organization should present a cash flow statement as an integral part of its Financial Statements....
It is beauty of Cash Flow Statement that it eliminates different types of accounting treatments and practices for the same items and in this way it enhances comparability and worthiness of financial statements with in same industry. The Cash Flow Statement if used with other Financial Statements gives true & fair picture of financial position of the organization in terms of its liquidity & ability to generate enough cash which is necessary to meet financial needs of the organization.
Statement of Cash Flow divides all activities of the entity into three main heads of activities
1. Operating Activities: such activities that relates to the core business of the entity falls under Operating Activities head.
2. Investing Activities: activities that are related to investments and other assets of the organization falls under Investing Activities head & finally
3. Financing Activities: activities that relates to long & short term borrowings of the organization and owner's equity.
in the ordinary course of business each and every organization performs different activities some are core business and revenue producing activities in which entire business is dependent i.e. core business activities of a bank is to lend money and core business of textile mill is to produce & sell cloths these are primary activities of the organization and generally shown in income statement of the organization these activities fall under the head of operating activities while preparing cash flow statement.
Logic behind separating entire activities of an organization in three different heads is to show ability of the organization to generate enough cash to meet its financial needs and organization has excess cash which it may invest or organization is dependent on borrowed money to run its business.
Now if organization is operating very well its operations should produce some excessive cash and the company will be in a position to make investments in other related revenue producing activities now the organization has many options it may expand its area of operations, replace its assets with newer models & may also make investments in other organizations as well these all activities are investing activities of the organization. On the other hand if its operations do not generate enough cash than the entity have to borrow money for its business such all borrowings repayment of loans and issuance of share capital etc falls under financing activities in cash flow statement.
The alarming situation starts when core activities of the organization goes to step down and its operating needs are not fulfilled by its own resources. And most alarming & worst situation arises when organization's operations as well as investments unable to generate enough cash to pay back its loans and organization needs and acquire further loan to repay existing loan in this situation the organization is suffering from high fever & if proper doze is not being given that boost up its operation it will goes into liquidation by the reason of bankruptcy.
Conclusion:
Cash flow statements helps management in using efficiently and effectively its cash & cash equivalents by highlighting the area's where organization needs special attention to enhance its liquidity and ability to generate cash. Since cash is life blood for every business the statement of cash flow if prepared in accordance with IAS 7 provides significant information about financial position of the organization and such information if used with other financial statements will show true and fair financial structure of the organization and will answer the following questions;
• Whether the organization is enable to pay back its loans at their maturity?
• Is it a beneficial decision to invest in the organization?
• How efficiently & effectively organization's resources are being used?
• What will be the expected future of the organization?
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