![]() Therefore, inter firm comparison of cash flows may also be misleading. Moreover, cash inflow does not always mean profit. The terms of purchases and sales will differ from firm to firm. Therefore, interindustry comparison of cash flow statements may be misleading. Often requested by banks, they may also be prepared as a part of the annual budgeting or forecast and estimate where cash shortages may occur in order to obtain additional funding. Usually a company with heavy capital investment will have more cash inflow. Pro forma statements of cash flow estimate how much cash inflow and outflow is expected in one or more future periods. The cash flow analysis is criticized for the following reasons:Ĭash flow statements do not measure the economic efficiency of one company in relation to another. Table-4 shows the pro forma of calculating cash from operating activity by using indirect method: 3. Table-3 shows the pro forma of calculating cash from operating activity by using the direct method: Cash flow from operating activities can be calculated by two methods, namely direct and indirect. ![]() ![]() Therefore, there is no separate proforma to calculate cash flow from investing and financing activities. The organization carries out these activities occasionally. However, investing and financing activities, such as issue of share capital and long-term borrowing, do not take place on a day-to-day basis. Therefore, a separate pro forma is used to calculate cash from operating activities. Accounting Standard (AS)-3 laid down two formats, namely direct and indirect methods for preparing cash flow statements. Institute of Chartered Accountants of India (ICAI) has provided 35 Accounting Standards, which should be followed while preparing any type of financial statement of an organization. The statement deals with the provision of information about the historical changes in cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities. The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation. The information about the cash flows of a firm is useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilize these cash flows. It provides important information that compliments the profit and loss account and balance sheet. Cash flow statement provides information about the cash receipts and payments of a firm for a given period. ![]()
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