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Cash Flow Statement - Essay Example

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Cash flow statement is a statement of inflows (sources) and outflows (uses) of cash and equivalent in an enterprise during a specified period of time. With this view a cash flow statement summarizes the causes of changes in cash positions of a business enterprise between dates of two balance sheets…
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Cash Flow Statement
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CASH FLOW MENT: Cash flow ment is a ment of inflows (sources) and outflows (uses) of cash and equivalent in an enterprise during a specified period of time. With this view a cash flow statement summarizes the causes of changes in cash positions of a business enterprise between dates of two balance sheets. Cash flows exclude movements between the items that constitute cash or cash equivalent because these are part of the cash management of an enterprise rather than part of its operating investing and financing activities.
Primary objective of the cash flow statement is to provide information regarding the cash receipts and cash payments of an enterprise for an accounting period. The secondary objective is to disclose information about the operating financing and investing activities of a company during an accounting period. The statement of cash flow gives an indication about the relationship between profitability and cash generating ability and thus the quality of profit earned. In brief, cash flow serves the following purposes:
Helpful in planning and coordination
Helpful in control
Useful in internal financial management
Knowledge of changes in cash position
Under this method cash flow from operating activities is calculated on the basis of net profit as reported in the profit and loss account or balance sheet and is especially used when amount of sales is not given in the question. Few adjustments made under this method are as follows:
Adjustment for non cash and non operating items:
For calculating operating profit before working capital changes, non cash and non operating items (such as depreciation, doubtful debts, dividend, and interest) are added back. The non operating incomes and gains are deducted from the net profit for the year.
Adjustment for changes in current assets and liabilities:
Decrease in current assets and increase in current liabilities is added back and increase in current assets and Decrease in current liabilities is deducted from the operating profit before working capital changes to arrive at cash generated from operations.
Thus under indirect method adjustments are made to net profit where as under direct method individual items of revenue and expenses are adjusted to calculate cash receipts and cash payments.
Adcock Co. for 2007
Net income
PLUS: Depreciation on plant assets
PLUS: Loss on sale of plant assets
net cash by operating activities
1. Eugene F. Brigham Louis C. Gapenski, 1994, 7th edition, Financial Management Theory and Practice.
2. Richard A.Brealey,Stewart C.Myers with the Brattle Group, 2004, Brealey and Myers on Corporate Finance, Financing and Risk Management.
3. Stephen H archer G.marc Choate George Racette 2E Financial Management, 1983 Read More
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