Module 5: Cash flow Statement

Module 5 - Case

Distinguish between cash flows from operating activities and cash flows from investing activities.

Cash flow from operations tells us how much cash, business generatse from their core operations, it specifically does not included cash generated from disposal of assets like property, plant and equipments and comes under the heading of the investing activity. This part very important for the shareholders because they came to know what amount of cash is generated from business operation and ultimately will benefit them in the form of dividend and capital gains.

Cash flow from operation tell us how much business invested or divested their investment, activities which are involved under this heading are purchase and disposal of property, plant and equipment, acquisition and other investments. Other investment in majority cases included investment in long term government bond.

Generally large cash inflow under the heading of operating activity is considered as good for the company because company is making profit from its core business operations, where as cash out flow under the heading of investing activity is considered as good because shareholders infer that their business is expending will be benefited form higher earnings in future.

Items under the heading of cash flow from operating activities are generally are current or short term in nature, where as the items under the heading of investing activity are non-current or long term in nature.

Compare the statement of cash flows with income statement using terms of net income and cash at end of the year.

The statement of cash flow only concerned with the cash that business has at the end of the year and only focuses on the operating, investing and financing activities, where as the income statement is only concerns with the revenue and expenditure base on the accrual methods. It is not necessary the cash generated at the end of the years is equal to the net income because some of the sales are on credit due to which accountants have to make cash flow statement to know the changes in cash position over time.

Income statement usually shows the operating income from the business operations, whereas the statement of cashflow show that how much cash business generate from its business activity and it also how much cash is generated or used in business expenses and income.Cash flow statement is based on the accrual accounting system unlike income statement, cash flow statement for the operating activities section of a different way of looking at things. The primary source of cash from operating activities and the business has to be over the long term, even though the growth of funds from operating activities that are actually used

Income statement uses accrual accounting system in which income are recognised when it is earned and expenses are recognised when they are incurred. Whereas prepaid expenses and advances for customer are not recognised in income statement until and unless, they are earned or incurred. In come statemnet also includes the adjustmeny of the non cash items on the balance ...